Novanta Inc (NOVTU) 2021 Q1 法說會逐字稿

Good morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta, Inc.'s First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please also note this event is being recorded.

At this time, I'd like to turn the conference call over to Ray Nash, Corporate Finance Leader for Novanta. Sir, please go ahead.

Thank you very much. Good morning, and welcome to Novanta's First Quarter 2021 Earnings Conference Call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is our Chief Executive Officer Matthijs Glastra; 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 Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call.

Novanta delivered outstanding results in the first quarter of 2021. Our teams executed very well, and we delivered above our expectations for revenue, profit and cash flow. We delivered all-time highs for revenue and bookings and excellent operating performance with adjusted EBITDA growth of 18% and free cash flow growth of 30% year-over-year.

Our company delivered approximately $163 million in revenue, representing 5% year-over-year revenue growth on a reported basis and 1% growth on an organic basis versus a strong first quarter of 2020. This is the highest ever single quarter sales for Novanta, which comes on the strength of rebounding markets and exceptional execution by our teams, as I'll speak to momentarily.

We are extremely pleased with how our teams drove exceptional operating performance using the Novanta growth system tools. In the first quarter, we expanded adjusted EBITDA margins by 200 basis points year-over-year to an adjusted EBITDA of $33 million or 20% of sales. Adjusted diluted earnings per share was $0.58, which is up 14% versus 2020. And our teams delivered strong free cash flow performance in the first quarter of 2021 of $20 million, up 30% year-over-year, at a ratio of over 175% of GAAP net income. All in all, very strong results.

We saw record bookings momentum in the first quarter with sequential bookings growth of 28% versus the fourth quarter of last year and year-over-year bookings growth of 25% versus the first quarter of 2020. We saw bookings strength across all our businesses with every unit having positive book-to-bill in the quarter. In the first quarter, our overall book-to-bill was 1.27. We saw very healthy momentum in many of our advanced industrial applications and also across multiple regions. As we indicated in our last earnings call, the industrial and electronics markets are leading a very strong recovery for Novanta.

Now let's turn to what we're seeing in our markets. In the first quarter of 2021, 55% of Novanta's total sales went into medical applications. Overall, sales to medical applications declined 1% versus a strong first quarter of 2020 and as a consequence of the continued deferral of elective surgical procedures. During the quarter, hospitals continued to have their focus on dealing with the winter surge in COVID cases and consequently, capital investments have not yet returned to growth.

Looking forward to the remainder of 2021, overall, large medical OEMs are increasing their demand as surgical procedure volumes are beginning to show momentum and multiple application areas are now positioning for a strong market rebound. Key applications such as DNA sequencing, integrated operating room technologies and lab diagnostics are showing strong sequential growth. We're seeing good order growth in surgical robotics, and we are expecting our MIS business to pick up steam as well in the second half. All of this is leading to our view that medical sales should return to growth as we progress further into the year, barring any further setbacks in the global recovery from the virus.

Novanta's sales to advanced industrial applications were 45% of total sales in the first quarter. In the quarter, our sales continued to rebound across multiple application areas with sequential growth of 12% and year-over-year growth of 12%. We also continue to experience higher demand specific to microelectronics investments in 5G, high-speed networking and cloud-based infrastructure as well as higher demand from EUV-based applications. We expect the increased microelectronics demand that we saw in 2020 to be sustained throughout 2021. From a regional perspective, our China sales grew over 40% year-over-year in the quarter, with Europe returning to mid single-digit growth.

As we look forward to the rest of the year, we expect 2021 to be a strong growth year for Novanta. We will be reinstating full year guidance given our confidence in our 2021 outlook. In this guidance, we are including effects of material and part shortages as Novanta is not immune to these. In some areas, we see the challenges and risks increasing despite the incredible work from our supply chain manufacturing and commercial teams. However, despite these challenges, we expect a very strong year and expect high single-digit to low double-digit growth for the year, and Robert will share the details on this later.

Now let me touch on some of Novanta's strategic growth metrics. Our vitality index, which is revenue from new products launched in the last 4 years, continues to be healthy at above 25% of sales for the first quarter. We have stayed the course on our innovation investments through the pandemic, and this decision is starting to bear fruit. In the first quarter of 2021, we launched 5 new products, and we are well on our way towards 25 launches for the full year, which has doubled the number of launches into 2020, with multiple new products in the queue for the remainder of the year, with focus on industrial and surgical robotics, minimally invasive surgery, precision medicine and diagnostics and Industry 4.0.

Let me touch on 2 of these launches. One product in our Precision Motion segment is Aura which expands our product portfolio of ultra small, precise and easy to install optical encoders for industrial and surgical robotic applications. Another example within our Photonics segment is MOVIA, a compact laser beam steering scan app, an intelligent subsystem, that is opening new application areas for us within marking and coding, converting and other high-volume material processing applications. We are excited about all of these products and see a healthy uptick in technical evaluations requested by existing and new customers.

Design wins in the first quarter more than doubled versus the prior year with multiple wins in most of our businesses and some large significant wins in several target applications in our minimally invasive surgery business. We expect to continue momentum with our design wins. However, the magnitude of the growth this quarter will be more normalized during the remainder of the year.

Moving on to other updates. The deployment of the Novanta Growth System continues to develop nicely. The results of the Novanta Growth System are already appearing in our financial results as evidenced by the gross margin expansion of over 150 basis points, reduced inventory and strong cash flow in the first quarter of 2021. We are very pleased with how our teams have leaned in to adopt this common way of working, and we see excellent opportunities during the rest of 2021 and beyond to continue to transform our operations and customer engagement using the Novanta Growth System.

We also continue to work at making Novanta an employer of choice in the marketplace. We continue to offer strong incentives and competitive compensation for our teams, including another broad-based equity grant made in April of 2021, which is similar to the old employee grant we made last year during the pandemic. In addition, we are actively engaged at further instilling throughout the organization, the Novanta way, which is our common company culture. We believe this common culture will drive significant employee engagement and help maintain low employee turnover despite the obvious challenges caused by the pandemic.

In addition to this, Novanta published its first-ever environmental sustainability and corporate governance or ESG report in the first quarter, which includes multiple topics, including diversity, equity and inclusion or DE&I in our workforce, environmental protection and product quality and safety. At Novanta, it is our vision to build a culture that is welcoming for a broad representation and background where everybody feels respected, included and feel they can succeed. We strongly feel we need to do our part in being a responsible corporate citizen. The first report is a good first step in explaining what we're doing now and what our priorities are for the future.

Finally, we continue to be active in the M&A market. Acquisitions are the primary focus of our capital deployment provided the targets fit our stringent financial returns as strategic criteria. We continue to work on a very active pipeline of opportunities, and we feel good about the progress we're making in this area.

In summary, our first quarter played out better than expected with record sales and bookings and excellent operating results. We feel good about our long-term strategic positioning in both medical and industrial applications with long-term secular trends in robotics and automation, health care productivity and precision medicine. And we are confident in our outlook for the year, a strong sequential and year-over-year growth and feel good about entering this recovery with a strong innovation pipeline and balance sheet.

So with that, I will turn the call over to Robert to provide more details on our financial performance. Robert?

Thank you, Matthijs, and good morning, everyone. I'll start by giving some details about the performance of our operating segments.

Starting with our Photonics segment. For the first quarter of 2021, our revenue was up 6% year-over-year and up 16% sequentially from the fourth quarter. This strong performance reflects the rebound in advanced industrial applications, which is giving us confidence in a positive outlook for this segment for the remainder of 2021.

Throughout the first quarter and now also into April and May, we have seen significant booking activity from our customers, indicating further growth in the applications in which we serve. Bookings in the first quarter were up 29% year-over-year and were up 12% sequentially. The book-to-bill was an impressive 1.21 in the first quarter. The innovation pipeline of our Photonics segment is having good success so far with multiple new product launches underway. These launches will help us gain share in adjacent high-growth application areas, such as via-hole drilling, for 5G mobile devices, laser additive manufacturing, battery processing for electric vehicles, fine material processing and micromachining for industrial and medical applications and high-speed automation and processing of sustainable packaging, known as the converting applications.

New product revenue stayed strong at greater than 20% of sales in the first quarter, and total NPI sales were up 19% year-over-year. Design wins were up 30% year-over-year in the quarter. And finally, sales to customers in China grew more than 50%, as we continue to see strong momentum in our Photonics products in the China market.

Turning to our Precision Motion segment. This segment saw 16% year-over-year revenue growth in the fourth quarter of 2021, with bookings growing 46% versus the prior year. Sequentially, sales were up 8% and bookings were up 26%. The book-to-bill ratio of Precision Motion was 1.36. The first quarter continued to show sustained strong demand for microelectronics applications, including investments in 5G, EUV and cloud-based infrastructure. These trends continue to remain robust as we look out for the rest of 2021.

In addition, we saw further strength in the robotics and automation space, both with existing customers and new product introductions. The medical portion of this business is also showing signs of a rebound as bookings from our surgical robotic customers are starting to come back. Within the Precision Motion segment in the first quarter, new product revenue grew by more than 20% and now make up strong double-digit percent of total sales for this segment. Design win activity in the segment was excellent and more than doubled in the quarter versus the prior year. And finally, the segment experienced another strong quarter of more than 50% growth year-over-year from its customers in China.

Turning to the Vision segment. This segment predominantly serves the medical end market and saw revenue decline 2% year-over-year versus a very strong first quarter of 2020, but sequential revenue growth was up 6%. As we've mentioned previously, our large medical OEMs are working past a temporary pause in demand growth corresponding to the rise in COVID hospitalization rates that persisted for most of the first quarter and the resulting deferral of surgical elective medical procedures. We continue to expect demand to remain paused in the first half with a second half recovery happening as the world economies continue to rebound and, most importantly, elective surgical procedures rebound.

Despite the near-term pause in sales, bookings in the Vision segment grew 46% sequentially and 12% year-over-year, and the book-to-bill in the quarter was 1.27. The vitality index in this segment remained about 30% of sales with new products being a key driver for the resilience we have been seeing in this business. Design win activity was especially good in the quarter, more than triple the amount of activity from the prior year as the minimum invasive surgery business closed on some significant wins with several large medical OEM customers. This is a huge accomplishment and further solidifies the exciting growth prospects of this segment over the next several years as we start to see these design wins flow into our sales figures.

Finally, we're very pleased with our Detection & Analysis business, which continued solid performance in the first quarter. This business unit primarily serves the diagnostic testing and patient monitoring applications with RFID, barcode, and machine vision technologies. This business continues to benefit from the rapid uptick in PCR and molecular testing as well as patient monitoring equipment purchases tied to the pandemic.

I will now move on from our segments to discuss other operating results for the overall company. We delivered $163 million in revenue in the first quarter of 2021, an increase of 5% year-over-year on a reported basis, an increase of 1% on an organic basis. As Matthijs already mentioned, this represents our highest ever single quarter of sales as a company, and we were extremely pleased with this result, which beat our own expectations on our previously issued guidance.

Turning to other operating results. Our first quarter non-GAAP adjusted gross profit was $73 million or 45% of sales compared to $67 million or 43.3% in the first quarter of 2021. In the first quarter, adjusted gross margins increased 170 basis points year-over-year and were up 70 basis points sequentially. This strong result was in line with our expectations and comes as a result of the ongoing work from our operating teams to drive the Novanta Growth System deeper into our day-to-day work. In addition, this performance was realized despite the continued pressure from high operating costs in our factories that were caused by the pandemic. We are extremely grateful for our teams, who continue to successfully operate our facilities during the pandemic, and we feel we can keep managing these incremental costs and challenges while still driving additional gross margin expansion during the rest of 2021.

Moving on to operating expenses. First quarter R&D expenses were nearly $19 million or roughly 11% of sales compared to $15 million or 10% of sales in the first quarter of 2020. We continue to have confidence in our innovation pipeline and, therefore, we'll continue to invest into the economic climate. We are already seeing the benefits of these investments as evidenced in our product launches and our strong design win activity so far this year. And our view has not changed that we have significantly -- significant near-term opportunities to take market share and win customer platforms.

First quarter SG&A expenses were $32 million or 19% of sales compared to $31 million or 20% of sales in the first quarter of 2020. Our SG&A expenses were better as a percentage of sales despite the return of incentive compensation plans in 2021, which have been canceled in 2020.

Moving on to other financial results. GAAP operating income was $11 million in the first quarter of 2021 compared to $13 million in 2020. Non-GAAP operating income in the first quarter was $23 million or 14% of sales compared to $21 million or 14% of sales in the prior year. Adjusted EBITDA was $32.7 million in the first quarter of 2021 or 20% EBITDA margin compared to $27.6 million in the first quarter of 2020 or an 18% EBITDA margin. Our adjusted EBITDA performance beat our expectations in our previously issued guidance, mainly driven by the stronger sales performance flowing through the profit.

On the tax front, our GAAP tax rate was negative in the first quarter of 2021. It differed from the Canadian statutory rate of 29%, driven mainly by jurisdictional mix of income, along with a significant windfall benefit from the equity compensation, which correlates to the vesting of the February 2021 of the all employee equity grant we issued in 2020. On a non-GAAP basis, our tax rate in the first quarter was 3%. This differed from the statutory rate, again, driven largely by jurisdictional mix of income and the windfall benefit from the vesting of the equity compensation. The effect of the windfall benefit will be muted as the year progresses.

Our GAAP diluted earnings per share was $0.32 in the first quarter of 2021 compared to $0.34 in the first quarter of 2020. On a non-GAAP basis, adjusted earnings per share was $0.58 in the quarter compared to $0.51 in the first quarter of 2020. The favorable result of our adjusted EPS was driven again by strong profit from higher sales and also a more favorable tax rate than we expected.

First quarter operating cash flow was $23 million compared to $18 million in the first quarter of 2020, a 31% increase year-over-year. This good result was driven by strong profit and by sustained improvements in our net working capital, which is being driven by the deployment of the Novanta Growth System throughout the organization. And finally, we ended the year with gross debt of $196 million and our gross leverage ratio of 1.6x. Our net debt was $82 million as of the end of the first quarter of 2021.

Turning now to guidance. As we look at the second quarter, we continue to see strong demand from the advanced industrial sector with capital spending continuing a strong recovery. For medical applications, so far, we are seeing similar dynamics in the first quarter with moderated demand, but we are growing more confident that we will see a solid recovery in this sector in the back half of the year. With this promising demand profile, it's very clear that the limiting factor in the near term will be supply chain disruptions caused by electronic material shortages, which are now being widely reported on. The effects of supply chain disruptions, both with Novanta's supply chain and the supply chain of our customers, which we are part of.

When it comes to our supply chain, our teams have been extremely diligent at addressing any potential material shortages or delays. In the first quarter, we were largely successful in containing any issues and finding ways to mitigate any risk we saw. As we've continued into the second quarter, we have seen some of these dynamics get more complicated, frequent and uncertain, which is making it more challenging to mitigate. This is, and we expect it to remain for the remainder of 2021, our single largest challenge across the company. That being said, it's clearly a temporary situation. And despite this situation, we feel we have much better visibility to not only the second quarter but the rest of the year, and so we'll now be reinstituting our full year guide for Novanta's results in addition to our guidance for the second quarter.

Starting with the second quarter of 2021. As we stand here today, we expect GAAP revenue in the range of $162 million to $165 million. We are expecting to see strong year-over-year improvement in revenue. The range itself is governed by the material availability as well as possible disruptions with our customers' production processes from their own supply chain challenges. It is not driven by demand, which is continuing to remain very robust. On a segment level, we expect strong growth in Photonics and Precision Motion segments, whereas Vision will continue to experience moderation in demand one more quarter.

Moving on to adjusted gross margins. We expect gross margins in the second quarter to be up 200 basis points versus prior year and roughly flat sequentially. This improvement will continue to come from our ongoing productivity programs and cost leverage from higher volumes.

R&D expenses in the second quarter will be approximately $18 million to $19 million, which is similar to the first quarter. SG&A expenses for the second quarter will be approximately $31 million to $32 million, also similar to the first quarter. Depreciation expense, which is about $3.3 million in the first quarter of 2021, will be similar in the second quarter. And amortization expense, which is $6.6 million in the first quarter, will be similar in the second quarter. Stock compensation expense, which is about $6.6 million in the first quarter, will be closer to $5 million in the second quarter.

For adjusted EBITDA, we expect a range of $32 million to $34 million. Interest expense, which is about $1.4 million in the first quarter of 2021, is expected to be similar in the second quarter. We expect our second quarter non-GAAP tax rate to be around 19%, absent significant changes in jurisdictional mix of income or other variability in any of our eligible tax benefits. This is a step-up in the first quarter due to the timing of the windfall benefit from stock compensation, mainly impacting the first quarter. Diluted weighted average shares outstanding for the second quarter will be approximately 36 million shares. For adjusted diluted earnings per share, we expect a range of $0.49 to $0.53 in the second quarter.

Turning now to full year 2021 guidance. As we stand here today, we expect GAAP revenue in the range of $645 million to $655 million. It is fair to say that the current level of customer demand we are seeing is at or above the upper end of our range. But as we've mentioned, our range includes the risks we are currently seeing in our supply chain at this time.

Moving on to adjusted gross margins. For the full year 2021, we remain committed to delivering upwards of 150 basis points of gross margin expansion in 2021, driven by continued progress in our Novanta Growth System productivity program, strong cost controls and better volume.

R&D expenses for the full year 2021 will be approximately 11% of sales. This level of spending reflects the continued investment we are making to execute on our new product launches for this year as well as continuing to pursue new design wins with our key customers.

SG&A expenses for the full year 2021 will be approximately 19% of sales, which is roughly flat to the prior year. Depreciation expense will be roughly $13 million for the full year 2021, and amortization expense will be roughly $26 million. Stock compensation expense will be roughly $21 million for the full year of 2021. This is slightly below 2020 levels, but higher than it was historically, which comes as a result of the new equity grant in 2021, which Matthijs mentioned in his remarks.

For adjusted EBITDA, we expect the range of $127 million to $134 million for the full year of 2021. Similar to sales, the upper end of the range is where profit should be if we mitigate the cost around the supply chain disruptions.

Interest expense will be approximately $6 million for the full year. We expect our non-GAAP tax rate to be around on 15%, absent significant changes in the jurisdictional mix of income and another variability of any of our eligible tax benefits.

Diluted weighted average shares outstanding will be around 36 million shares for the full year. And adjusted diluted earnings per share, we expect in the range of $2.04 and $2.19 for the full year of 2021. We expect capital expenditures to be around $20 million during 2021. As always, our guidance for both the second quarter and the full year do not assume any significant impacts from foreign exchange changes.

In conclusion, we're extremely pleased with the results from the first quarter, especially the record levels of sales and bookings. We are confident that the full year 2021 will show strong organic growth, gross margin expansion and a record number of new product launches. We remain very proud of the performance of our employees and their tireless efforts to help us be successful in a challenging environment. And most importantly, we remain excited about our future and look forward to continuing to deliver on our commitments to our employees, our customers and our shareholders.

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

(Operator Instructions) The first question today comes from Lee Jagoda from CJS Securities.

So I guess it sounds like within your guidance for the year, you're basically saying that demand is outstripping supply with the headwind being the supply chain and some of the shortages you're seeing in certain products. If it weren't for the headwind of supply chain and you were actually able to produce to demand, how does that change the -- or how would that change the revenue guidance given the top end now is implying roughly 10% or 11% year-over-year growth for the full year?

Yes. So I would say, obviously, what we gave in our prepared remarks is that the upper end of the range is where we're seeing demand currently. And in fact, if the bookings continued at this pace, we'll probably exceed that number from just a pure demand profile perspective. So I would say that not only is our supply chain, but the supply chain of our customers is really kind of governing the growth right now.

Okay. And then just the same kind of question around margins. You're saying -- I think you said 150 or 200 basis points of -- or 150 basis points plus of gross margin expansion expected this year. How much do you think that's being held back by supply chain issues and either inflation or just the inability to get supply?

I would -- the 150 basis point expansion is driven net of all those things. And so effectively, what you're trying to get at is could you expand margins higher? The short answer is yes. They would go up higher than that, absent those effects. I don't want to get into kind of specifics, but it is certainly our ability to continue to expand above that level is currently there. It's just dealing with these changes. We're a little reluctant to go out there and get over the end of our skis.

Yes. That's fair enough. And I have one more, and I'll hop back in queue. Just if I look at the bookings numbers, is any of that or can any of that be attributed to customers' front-end loading bookings because they're either scared that they can't get the supply or are just overordering? And if that's the case, are you able to kind of lock them into terms that are more favorable to you just in case things get delayed or canceled along the way?

Yes. Lee, at least in our case, we don't see customers front-end loading. We really see the industrial side coming off a pretty soft last 3 years, right it was the trade wars and then COVID. So you really see economy is really opening back up and particularly our industrial customers, yes, seeing the demand and seeing that activity. So we don't see any general kind of buildup or anything. And on the medical side, I think it's fair to say that orders are coming in, but we do expect that order pattern to actually continue as well in the, let's say, the remainder of the year. So in short, we don't really see kind of from that loading. Now when shortages continue, we're taking a very critical look. We're very close to our customers. We know what inventory levels they're sitting on and rest assured, we will not let that go out of control.

Our next question comes from Richard Eastman from Robert W. Baird.

So maybe a little bit of conversation or discussion, maybe just around the cadence of orders to revenue in the Vision business. And is that -- how do you feel about that? I think you referenced that maybe the second quarter in -- might be still a bit softer year-over-year, but then we see growth in the back half of the year. And is that -- just speak to the cadence there of orders versus revenue recognition, if you would?

Yes. I mean, listen, I think there, we have seen in parts of our Vision segment, we have seen a little bit more challenging, let's say, areas for supply. And so that impacts some of the sequencing. Overall, I think the orders do reflect, I think, a positive outlook of our customers. And also, we've commented in the past that a single quarter or better can sometimes be a little bit lumpy. So I would say those 3 effects, I think, they feed into what you're seeing in terms of timings of bookings versus revenue. So -- and if anything, it gives us a good, let's say, confidence that Vision will pick up in the second half of the year.

Got you. And is there -- was there growth in the consumables piece of Vision versus the equipment side? Is it still the equipment side that's down meaningfully?

Yes. We didn't comment on that. I would just say that the remarks for the consumables follow, I think, the generic remarks that we made. What we basically saw in our MIS segment overall is that the lockdowns were pretty hard, right, and let's say, in the latter part of last year and the first part of this year. And I think only recently, it started to reopen, and you can kind of see that in the remarks made by, let's say, large medical OEMs that only towards the latter part of the first quarter, they're starting to see some recovery. And so basically, towards us, we're trailing that by a good 90 to 120 days, right? So that's basically what you're seeing. So -- but right now, we do see them ordering, starting to order more, and therefore, that feeds into our confidence for the second half. The first half will still be a little bit soft.

Okay. Yes, fair enough. And then just maybe my last follow-up question here. Around the China and regional growth there, I mean, you did speak to a 40% plus growth in China. Presumably, that's led by the advanced industrial product lines. Is there any change on the medical side? Or is that quite small in China?

Yes. Medical is still fairly small for us in China, to be very honest. So our -- the OEMs that we deal with are mostly western OEMs on the medical side. Now having said that, we do see Chinese OEMs starting to ramp and rest assured, we are, of course, engaged there. But that business for us is still fairly small. The majority of our China growth right now is Photonics and Precision Motion driven. It's about 50-50. So I think what is encouraging is that, of course, last year, the growth in China was primarily Precision Motion driven on the back of 5G infrastructure and PCB demand. This year, it's more balanced with our Photonics business doing really a stellar job there in gaining share and of course, on the back of markets that are very buoyant as well. So we like, let's say, our performance in China, and we are continuing to invest in local sales teams, local manufacturing, and even engineering so to kind of get more local-for-local presence there. So yes, you can expect us to lean into the local Chinese market.

Our next question comes from Brian Drab from William Blair.

In terms of capacity utilization, can you talk a little bit about where you're at? I mean you're achieving record level results and forecasting to go above and beyond that. And just wondering, are you able to find the people you need as you head in that direction?

Yes. So first and foremost, I mean, capacity utilization typically is a term that you use when you have like big fabs and that kind of. So basically, for us, it's materials and labor and the main gating item, as we highlighted, is actually the material. So it's basically our supply chains not able to follow what is an unprecedented rebound, right? That is across the board. And then, of course, having both at the same time in demand and the supply shock, right, because you see some shocks on the supply side, too. So that's really more gating us than anything else. Of course, we are very active in making sure that, yes, we're getting the labor in that we need. Of course, Novanta Growth System helps there, that's basically leaning out our production floor, so we get more out per area. But I would say the main message here is that the supply chain is gating our growth more than anything else.

Okay. And then the Precision Motion gross margin was a little lower than I was modeling. Photonics was a little above. I know you made some comments around this. I think some of it has to do with supply chain. Can you just talk about why that might be? Maybe it's just because I modeled incorrectly? And then how do you see the gross margin for the segment as progressing as you move through the year?

Yes. I mean, no, you didn't really kind of model correctly. I do think it came in a little lower than we were expecting. Some of that was the expediting fees and some inefficiencies in our labor production as a consequence of some material shortages. We did overall able to mitigate for that elsewhere. So it's not always we're able to mitigate it per se in a specific business segment, but we are able to work it out across the overall organization, so I do think some of those things are tempered. We have gotten some of the material in now to deal with our second quarter, and we should be able to hold a better gross margin profile as we get into the second quarter. But that short term in the first quarter was really tied to that.

This level in Photonics, I think, was a little over 49% gross margin in the quarter. Is that sustainable that was a little better than I was expecting.

Yes. I hope so is the short answer. I mean some of that is tied to the NGS process where we've really kind of leaned out the production processes and got better efficiency around that. I think that team has done a better job of mitigating their supply chain disruptions and so they've been able to get the right sort of materials in advance. They took some of the warnings in the fourth quarter to heart. And I also think that from a level-loading perspective, they've been able to plan well ahead of time. There is some expansion going on there right now. We are expanding our optics facility in the U.K. I'm not expecting any major disruptions from that. And in fact, that should really kind of enable us to continue to expand that gross margin, but the short answer is that should hold for now.

(Operator Instructions) I'm showing no additional questions. We'll end today's question-and-answer session. I'd like to turn the floor back over to Mr. Matthijs Glastra for any closing remarks.

Thank you, operator. So to summarize, Novanta's performance in the first quarter of 2021 was excellent. We had record sales and bookings and beat our own expectations for profit and cash flows. Our innovation programs are healthy and progressing, and we launched 5 new products in the quarter and are on track for our ambition plans to launch 25 new products throughout the year, which is double last year's. We saw tremendous growth in design wins and feel confident that we're succeeding at growing our presence in our target application areas. We're excited to see the rebound happening in the global economy and particularly in the advanced industrial sector with a return to growth also on the horizon in the medical sector. Novanta is well positioned in these sectors with diversified exposure to long-term secular macro trends in robotics and automation, precision medicine, minimally invasive surgery and Industry 4.0.

In closing, I would like to thank our customers, our employees and our shareholders for their ongoing support. I'm particularly grateful for the dedication and strong contribution of our teams, of committed Novanta employees, who have rapidly pivoted and are again showing up and serving our customers during one of the strongest recoveries ever experienced. We appreciate your interest in the company and your participation in today's call. I look forward to joining all of you in several months on our second quarter 2021 earnings call. Thank you very much. This call is now adjourned.

Ladies and gentlemen, with that we'll conclude today's conference. We thank you for attending. You may now disconnect your lines.