Good morning. My name is Francesco and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated 2019 Third Quarter 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] Please note, this event is being recorded. I would like to turn the conference over to Mr. Ray Nash, Corporate Finance Leader. Please go ahead.

Thank you very much. Good morning and welcome to Novanta's third quarter 2019 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 performed in line with our expectations in the third quarter of 2019 with revenue flat sequentially versus the second quarter and EPS exceeding the top end of our guidance. Our company delivered $154 million in revenue, representing a 6% year-over-year decline on an organic basis, and 4% decline on a reported basis. Year-to-date, our revenue grew just below 2% year-over-year, both on a organic and a reported basis. We exceeded the top end of our adjusted earnings per share guidance at $0.53, adjusted EBITDA was $31 million, our book-to-bill was 1.04 in the quarter, and bookings grew sequentially by 14% versus the second quarter. Our team executed very well in a deteriorating industrial capital spending climate. Novanta's positioning is favorable with over half of our revenue in medical markets that are structurally growing. We remain laser-focused on growing faster than the market with proprietary motion, vision and photonics capabilities in a diverse set of applications, driven by secular Industry 4.0, precision medicine, and healthcare productivity trends. We are strongly investing in innovation and commercial capabilities through business cycles to enhance our proprietary technology position and long-term sustainable growth potential in secular growth applications such as robotic surgery, minimally invasive surgery, DNA sequencing, advanced material processing, and precision automation and robotics. In the third quarter, we continued to see solid momentum and success in our efforts to introduce new innovations to our customers. On the back of our innovations -- in innovation investments made, we feel our innovation pipeline is the strongest in a decade. As a result, we are committed to continue to invest in R&D to bring these innovations to market in the second half of 2020 and 2021. We also continue to see the fruits…

Thank you, Matthijs and good morning everyone. We delivered $154.1 million of revenue in the third quarter of 2019, a decrease of 4% year-over-year on a reported basis and the decline of 6% on an organic basis. While the industrial capital spending environment and the economic climate in Europe and China deteriorated in the quarter, we are pleased with the organization's ability to deliver on our promised revenue guidance for the quarter. From an end market perspective, sales and microelectronics applications were down more than 30% year-over-year, which is similar to the prior quarter. Sales of the industrial end markets were down nearly 20%, which worsened from the second quarter, as we previously communicated, due to the order delays in the second quarter. And sales to medical end markets were up high teens year-over-year, despite the headwinds in DNA sequencing in the quarter. Overall, sales and bookings were largely in line with our expectations. Turning to profit, our third quarter GAAP gross profit was $64.1 million or 42% of sales compared to $69.6 million or 43% of sales in the third quarter of 2018. On a non-GAAP basis, third quarter adjusted gross profit was $67.4 million or 44% of sales compared to $72.1 million or 45% in the third quarter of 2018. Our adjusted gross margins were roughly flat sequentially, and down versus the prior year, driven by the significant growth in our medical consumables product line, which is driving an unfavorable mix effects. The adjusted gross margins in our Photonic segment continue to improve sequentially, despite the lower sales year-to-date as the team has done an excellent job at reducing the cost of poor quality to their lowest level in the years, and by implementing proactive cost control measures to mitigate the near-term reductions in volume. Within our Vision…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lee Jagoda with CJS Securities. Please go ahead.

Hey, it's Lee from CJS.

Hey, Lee. Good morning.

So, just starting with, I guess, we'll call it the in-vitro diagnostics end market, can you talk about the outlook for Q4 versus the guidance that you gave on the Q2 call?

Yes, I would say there is no change in that, so that business returns to sort of flattish performance in the Q4. So, there is -- we're not seeing any kind of delays there in any push-outs or any sort of changes from what we communicated last quarter.

And then as we look at the 2020, that in line with market growth or, however, you want to put it, should return, is that the expectation?

Well, we are -- what I would say is, we are embedded on all the high throughput screeners in the DNA sequencing market, so, in relation to one large customer. So, how they perform and how we'll perform.

Okay. And then looking at Q1 of 2020, seasonally, typically, you see a modest organic decline versus Q4. However, obviously, given the softness and some of the push-outs you talked about, is that still a reasonable expectation? And how do you think about that $10 million of push-out, does it hit right away or does it kind of gets spread out?

Yes, I was trying to steer clear of getting into 2020. It is fair to say that that will definitely benefit us in the first half. There are a couple of other things going on in the first half is, obviously, some more difficult comps on the medical side of the business, and the industrial is remains to be seen.

Yes. So, I would say, Lee, from a market perspective, right, I think we continue to see our medical business to be robust. Keeping in mind that we have indeed -- after growing double-digits very strongly this year, we have some tougher comps next year. And yes and the industrial climate will -- yes, is expected to be uncertain, while we do see, of course, much easier comps in the second half of next year. So, that's how we're looking at it right now. And we'll get more into detail, let's say, once we give our full year guidance for 2020.

Got you. And then just one more, and I'll hop back in. On the Vision segment gross margins, obviously, you highlighted mix towards consumables dragging down your margins. But given the facility consolidation headwind in the duplicate facilities you're running, how much do you think that is dragging you down negatively. So, as we look into next year when that switches to a neutral or positive, in addition to everything else you're doing to improve margins. What sort of the low hanging fruit on margin expansion within Vision?

Well, I think what -- let me go answer it a few ways. So, one of the big benefits in 2020 in the Vision segment is the closure of the NDS manufacturing facility, which adds about $2 million worth of benefit to us. And so you'll see an uptick in the Vision gross margin as a consequence of that manufacturing facility completely closing down. That's one of the big first steps. The other steps we're working on are obviously the low-cost manufacturing facility that will take a little bit longer. We're looking at pricing decisions in the business and we're looking at what we call VAVE which is Value Engineering to reduce the cost of manufacturing and reduce the complexity of the manufacturing to improve the gross margin. And then the final thing we're looking at is increasing the amount of throughput that we can get through the existing facilities, which were then thereby allow us to leverage the footprint that we have in Germany even better. And so, we look at this is kind of a grad, next year, it will be a little bit of a step-up in gross margins in the Vision segment that will help us. Then as an overall company, we should not see as much of a headwind as a consequence of what's happening in there and that will allow us to drive that higher gross margin improvement.

Got it. It's very helpful. Thank you.

Thanks Lee.

The next question is from Brian Drab with William Blair. Please go ahead.

Hey, good morning. Thanks for taking my questions.

Hey good morning Brian.

Would you mind stepping through the book-to-bill for each segment and for the total?

Yes, we'll do that right away. So, for the third quarter, we -- the Photonics segment book-to-bill was 1.11. Yes. For the Vision segment, it was 1.03, and for the Precision Motion, it was 0.94, and where we set for Precision Motion, actually the -- that improved versus the second quarter. All segments actually improved their bookings sequentially and overall, the sequential bookings improvement was 14%, so 14% versus the second quarter.

Okay, got it. And sorry, did you say the aggregated book-to-bill?

1.04 -- it's 1.04.

Got it. Okay. And bookings up 14% in aggregate?

Right. Versus the second quarter, yes.

Got it. Versus 2Q. So, Robert, you just made the comment that you are steering clear of 2020 guidance and that's, obviously, understandable. But in the past, I think, it was on the second quarter call, you did mention that you thought that a 46% gross margin was achievable in 2020. I just wonder, it seems like some things have changed since then obviously. So, how do you -- you step back from that?

Yes. No, I didn't mean to step back from that if that was an intent. So, we do see better gross margin improve next year. And that is certainly, -- what I was being a little hesitant on is giving some details around the sales mix and then what to expect on a quarterly basis. But from a gross margin, we're exiting the year with some nice benefits, not only are we gaining on the material productivity side, but we get to close the -- that NDS manufacturing facility, and that's carrying a lot of costs associated with it. So there is a number of things that really kind of benefit us. And then frankly, as you look at -- you get the easier comparables in the back half of the year on the industrial side, and the portions of those business -- when they return, it will be higher margin than what you see on the medical side. And so, you get a little bit of a better mix effect in the back half of the year as a consequence of that.

Okay, great. And then, so just to be really clear, you said you did not back away from the 46%, as a full-year target for gross margin?

Yes, I did not back away from that.

All right, okay. Okay. I just want to make sure I heard it correctly. And then just one last question, Matthijs, you talked about some of the acquisitions, I think was with respect to Arges that that could have a meaningful impact on your business. And I was just wondering if you can just talk in a little more detail about the timing and kind of magnitude of what you mean by meaningful, I guess?

Yes. So, meaningful means that we fundamentally can accelerate and rejuvenate our Cambridge Technology innovation pipeline. And pull forward the plans that we have had maybe coming to the market in three to four years from now to kind of 2021 and the second half of 2020. So, that's what we feel is meaningful, right? And we're talking not like one product, we're talking in line up of probably six projects here and all targeting high-growth markets. Fundamentally, improving our architecture and rejuvenate to basically further expand our leadership position in integrating the IP that Arges has, which takes years to develop, right? So, and what's great to see is that the engineering teams of those two entities that are now just basically matched into one are just super excited too to accelerate, because it's -- basically, the capabilities are truly complementary and the engineers couldn't be more excited, which is to me, you don't know that ahead of when you do an acquisition, but to see that come to fruition, yeah, it makes me really excited. And these are the type of acquisitions that might take a little longer before you see kind of the financial benefits, but strategically, yeah, we couldn't be more pleased. So we will report in 2020 when these products will get introduced, obviously. As a reminder, these products will then have to be designed in to customers. So, before you see revenue contributions, it might take a little while. But, yeah, we were taking a leap forward here in terms of our potential in the high growth markets like micro machining and additive manufacturing. And last but not least, our customers are giving us that this feedback too. So, it's not only internally, our customers are really impressed with this lineup. So--

And so, is the bigger opportunity or maybe the answer, this is all of the above, but is it a bigger opportunity in getting into some new end-markets or is it more--

Yeah, it was basically.

[Operator Instructions] Go ahead, sorry.

Yes, sorry, where we -- the line is a little choppy. No. So what I -- the way I see it is we were able to win new customer platforms, because we were not able to address certain segments, or certain customers, because we didn't have the full capability set, and we were developing that. But now with the Arges acquisition, we just accelerate that capability set. So, we can go after those platforms, passively [ph] much more quickly and [technical difficulty]. So, it is -- summarizing, it is going deeper in certain segments that we were in today that are growing like laser additive manufacturing, but conquering new customer platforms. And then also accelerating entry into new market segments. Yes.

Okay. Thanks very much. Thank you.

All right.

[Operator Instructions] 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. So, to summarize, in the third quarter of 2019, Novanta delivered a solid performance in a uncertain macroeconomic environment. We're very pleased with our positioning and performance in our medical businesses, and proud of the performance and agility of our teams in a weak industrial capital spending environment. Our design win activity is accelerating new product introductions and innovation pipelines are as strong as they've ever been and Novanta's leadership positions across diversified medical and advanced industrial markets combined with our disciplined approach to M&A is providing a solid foundation for long-term sustainable profitable growth. We continue to feel good about the positioning of our businesses around secular macro growth drivers with over half of our revenue in robust medical markets. We see a long-term need for our Motion, Vision, and Photonics capabilities in a variety of applications on the back of macro trends of Industry 4.0, precision medicine, and healthcare productivity. We therefore continue to remain excited about the applications we play in, and the positions we have, and continue to invest in long-term organic growth, innovation and M&A. In closing, I would like to thank our customers, our employees, and our shareholders for their ongoing support. I'm particularly grateful for this strong contribution and execution of our teams of committed Novanta employees that are showing tremendous dedication and agility. 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 from now on our fourth quarter, and full year 2019 earnings call. Thank you very much. This call is now adjourned.

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