Good afternoon My name is Dana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated 2017 Q3 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. It is now my pleasure to hand the conference over to Ray Nash, Corporate Finance Leader for Novanta. Mr. Nash, the floor is yours.

Thank you very much. Good morning, and welcome to Novanta's third quarter 2017 earnings conference call. I'm 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've not received a copy of our earnings press release issued today, you may obtain it from the Investor Relations section of our web site at www.novanta.com. Please note this call is being web cast live and will be archived on our web site. 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 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 today. 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 today's forward-looking statements as representing our views as of any date after today. 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 web site after this call. I'm now pleased to introduce the Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good afternoon everybody and thanks for joining our call. Novanta delivered another record quarter, beating both our revenue and profit guidance. Our company delivered $146 million in revenue, representing 50% year-over-year reported revenue growth and 8% year-over-year organic revenue growth. This is our fourth consecutive quarter of high single digit or double digit organic growth. In addition, we expanded our EBITDA margins year-over-year by 200 basis points to 20.6% of sales. Adjusted EBITDA was $30 million, which is up nearly 70% versus last year. Our adjusted earnings per share was $0.45, which was up 55% from $0.29 in the third quarter of 2016. At Novanta, our mission is to deliver innovation that matters, providing mission critical functionality to our OEM customers, while improving productivity and enhancing people's lives for our end users. We believe that the strength of our team and our robust business model and diversified applications, with a balanced exposure to medical and industrial markets are serving us very well. In the quarter, we continue to see broad based growth momentum across the company, with all three operating segments demonstrating double digit year-over-year reported revenue growth. Our solid organic revenue growth performance is a direct result of our ability to capitalize on an improving macroeconomic climate, and our ability to execute on our strategic growth initiatives. We are experiencing broad based strength within a majority of our end markets, including lifescience, minimally invasive surgery, and advanced industrial. Examples of growth applications where we deliver innovation that matters are DNA sequencing, robotic surgery, endoscopy, advanced laser material processing and warehouse automation. We continue to make good progress on our strategic growth priorities, driving long term organic growth through commercial excellence and innovation. Year-to-date, our design wins and new product revenue increased by more than 30% year-over-year,…

Thank you, Matthijs. Good afternoon everyone. We delivered $146.3 million in revenue in the third quarter of 2017, an increase of 49.5% on a reported basis. The net effect of acquisitions and divestitures resulted in increase of revenue from $40.8 million or 41.7%, whereas foreign currency exchange rates adversely impacted our revenue by $300,000 or 0.3%. Consequently, organic growth was 8.1% year-over-year. Our year-over-year and sequential revenue growth exceeded our own expectations. This was primarily driven by the acquisition of WOM, which was due to a regulatory change in Europe, and is experiencing some last time buys from a handful of our customers and in the second half of this year. This business is doing terrific and the integration is proceeding as we planned. We expect the business to deliver on the growth we planned for in our deal model and we in fact, see additional opportunities in 2019 and beyond, that we are working on now. Third quarter 2017 GAAP gross profit was $58.7 million or 40.1% of sales. This compared to $41.2 million or 42.1% of sales in the third quarter of 2016. Included in gross profit for the third quarter of 2017 was the impact of $6.5 million or 4.4% of sales of amortization of purchase developed technologies and inventory fair value adjustments associated with our acquisitions. On a non-GAAP basis, third quarter 2017 adjusted gross profit was nearly $65.2 million or 44.5% of sales, compared to approximately $42.3 million or 43.3% in the third quarter of 2016. The increase in gross margins year-over-year was driven by higher revenues in the sales mix of higher margin products. The strong year-over-year performance in gross margin, that's an underlying and temporary challenge in our Precision Motions segment. The double digit growth we have been seeing in our Precision Motions…

[Operator Instructions]. The first question comes from Lee Jagoda with CJS Securities. Your line is open.

Hi. Good afternoon and good quarter.

Hi Lee. How are you? Thanks.

Sure. So can we just start with -- can you go through by segment, the organic growth rate in each of the three segments?

I don't think we have ever disclosed organic growth in each of these segments. And not to say that we wouldn't do it on a go forward basis, I'd have to go back and calculate it, because that's a factor in the FX rates in each of the individual areas. I think if you were trying to get at is, what's a contribution of WOM, Laser Quantum and ThingMagic, we do disclose that in our Qs. So for the third quarter, I think, Laser Quantum, in terms of revenue, we deliver about $13.6 million for the quarter. And in terms of WOM, it was around $24.8 million. So that should pretty much get you there.

Got it. Yeah, that's where I was going. So I guess, stepping back, looking at DNA sequencing and robotics, minimally invasive surgery and things like that, can you talk a little bit about your sales cycle and your lead times as it relates to some of the bigger customers, so we can get an idea for how your sales might correlate to theirs on a lag?

You mean the correlation of our sales to some of our customers?

Correct.

Yeah. I mean, that's sometimes very hard to say. I mean, it depends on how much inventory our customers have in their chain, but it's not like there is a year in between or so, right? So when you see a pickup, typically, barring any supply chain overbuying on their side, there is a pretty strong correlation, and it could be, that there is one or two quarters of delay. So we don't -- I thought you were going more on the designing cycles. Now, those can be very long. So that when we work with certain customers, they can -- sometimes in medical space, they can sometimes be three to five years even. For the moment, we have a product to having a designing and then seeing the revenue that can last three to five years. So that [indiscernible] the lag is.

And with regard to WOM, can you talk a little bit about the timeline to see some of the cost savings and the capital investment that you guys might need to execute on that strategy to get margins back towards corporate average?

Yeah Lee, I think we commented, when we did the announcement that we won't see the main benefits until 2019. And the reason for that is, is that, again, regulatory changes, and as we -- when you go after cost productions, you need to get regulatory approval and have to go through those changes with the customers, right? So that's why circulators [ph] leadtimes of those investments as well. And we commented as well, that we see the biggest opportunity in the consumables area, and that requires in-sourcing and a few other changes that we are doing. But we have started to recruit the team actually, that is executing on those challenges and we are very thrilled with that team. Actually a COO that comes from a very strong, say, lean improvement background and gives us a lot of confidence that we will get there. Again, it won't be like next quarter, it will be until 2019, consistent with what we said at our announcement.

Sure. And Robert, just from a capital investment standpoint, obviously, if you are going to do some in-sourcing, there is going to be some capital investment there. You have talked in the past about ERP implementations, although probably smaller. If I look at sort of historical EBITDA conversion to free cash flow versus what you might do in 2018 to 2019, are there puts and takes or is there going to be some lower conversion in 2018?

It is a great question. I need to kind of work our way through that now, as we are going through our budget. I can directionally tell you that the CapEx -- we still spend very little on CapEx as an organization. But we are trending, I think somewhere closer to $9 million for this year, and I think our CapEx will go up a little bit next year. Not really that much associated with the WOM acquisition, we have some facility investments we need to make, because our volume has been growing so fast. And then in 2019, there will certainly be some higher CapEx associated with some purchases in the WOM business. So that's where I would expect to see the larger element kind of pickup. And then that should then tick back down. If you take the ratio of CapEx to sales, probably, rotate this year, that should kind of where things normalize on a long term basis.

Got it. And you gave R&D expense guidance for this year around 8% for the full year I guess. In terms of looking forward, when you are doing your 2018 budget, you are looking at that as a percent of sales, or are you looking at it in dollars and -- how should we think about that?

Yeah. So we are going right through our reviews right now. We have had a couple this week already. Disclosing too much on that, sets those guys up for -- coming up with numbers. But, I wouldn't say, all costs in our organization are kind of zero based, so we kind of start from the bottom and we work our way up and rejustify all the investments that we are making on an ongoing basis. So we avoid kind of some cost scenarios, where things just sit and accumulate and are not driving the returns that we'd expect. So everything is kind of up for discussion. So I think, as you go back to my comment in the third quarter, we were hoping R&D would be kind of closer to 9% of sales, and that's just because of the investment we are making. We didn't achieve that, [indiscernible] that the sales outpaced our investment plans. So dollar-wise we are on track, but percentage-wise we are lower, because our top line grew much faster.

Good problem to have. That's all I have. Thank you very much guys.

Okay, thank you.

[Operator Instructions]. The next question comes from Jared Berlin with Thames Capital Management. Your line is now open.

Hi. Thank you so much. Results are quite good and it's nice to see WOM, one of your larger acquisitions moving along. And the company has done such a really great job with some of these deals recently. And I was just hoping you could expand on your comments, where you said the pipelines for future acquisitions is quite good in the near term, it's going to be more about sort of integrating the recent deals and I am just curious to understand, how you plan to balance those two, to be a rough timeline for what integration looks like?

Yeah. Well I would say overall, we have always been very disciplined on acquisitions, right? With focus on cash returns and free cash flow accretion. So that's -- so no matter what, that is our focus, and you should expect us to maintain that discipline. And as you know, acquisitions are hard to time, and we are not making it a habit to get into how many are in the pipeline, and when to expect for -- what type of acquisition to come. So that's why we -- on purpose, maybe a little coy there. I do think it's important, that as we have done a few larger deals now, both with Laser Quantum and with WOM, that we make sure that we -- the integration continues to go smoothly. We are very pleased, by the way with integration, and so as you can continue to see very positive results there. So yeah, we will announce deals as they come up and as they pass our filter criteria. And again, our pipeline is very solid. But as you noticed with this success [ph], that a lot will drop out, when you have stringent filters.

That sounds great. Thank you very much.

And at this time. There are no further audio questions. I would now like to hand the conference back to Mr. Matthijs Glastra for closing remarks.

Thank you, operator. So to summarize, it's a great time to be a part of Novanta. Our focus on accelerating profitable growth and the diversity and strength of businesses was evident in our strong financial results. We are well on our way in executing our 2020 strategic direction to double the company and revenue to $750 million in revenue, with 20% EBITDA margin, growing organically 5% to 7%, while generating more than 50% of our revenue from medical markets. Our growth strategy is focused on multiple growth drivers. Relentless focus on establishing leading positions in growth markets, expansion over served markets through innovation and disciplined M&A, with focus on expanding our medical presence. Deeper market penetration globally, through stronger and larger commercial team. And all of this, while maintaining our commitment to disciplined execution and a continuous improvement. In closing, I would like to thank our customers, our employees and our shareholders for their ongoing support. 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 fourth quarter earnings call. Thank you very much. This call is now adjourned.

Thank you again for joining us. This concludes today's conference call. You may now disconnect.