Good morning. My name is Keith, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc. 2021 Fourth Quarter and Full Year Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the call over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Thank you very much. Good morning, and welcome to Novanta’s fourth quarter and full year 2021 earnings conference call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today’s call is our Chairperson and 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 Chairperson and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining us. Novanta delivered another record quarter and a record full year of 2021. We hit new all time highs for revenue and bookings with strong operating performance for both the fourth quarter and the full year of 2021. We exited 2021 at a $800 million revenue run rate with a record backlog of $569 million and close to $1 billion full year bookings. This is a great indicator. The structural long-term demand drivers in the medical and advanced industrial markets we serve. It also sets us up with excellent visibility to customer demand and sales growth in 2022. In the fourth quarter, our company delivered $199 million in revenue representing 35% year-over-year revenue growth on a reported basis, and 14% growth on an organic basis eclipsing the mark set last quarter. For the full year of 2021, Novanta had sales of $707 million, which is up 20% year-over-year on a reported basis, and 10% on an organic basis. In addition, we had another quarter of excellent operating performance with adjusted EBITDA of $43 million in the fourth quarter up 31% year-over-year. For the full year adjusted EBITDA was $153 million, which is up 26% year-over-year. Our adjusted diluted earnings per share in the fourth quarter was $0.67, which is up 26% versus prior year and for the full year adjusted EPS was $2.62, which is up 34% versus 2020. We are extremely pleased with and proud of how our teams drove exceptional operating performance using the Novanta growth system tools, despite widely reported supply chain challenges, which I speak to in a moment. We saw on another quarter of record breaking bookings in the fourth quarter with sequential bookings growth of 32% versus already a very strong third, fourth –…

Thank you, Matthijs, and good morning everyone. Our fourth quarter non-GAAP adjusted gross profit was $88.3 million or 44% adjusted gross margin compared to $65.4 million or 44% adjusted gross margin in the fourth quarter of 2020. For the full year, our non-GAAP adjusted gross profit was $319 million or a 45% adjusted gross margin compared to $256 million or 43% in 2020. For the full year adjusted gross margins increased approximately 170 basis points year-over-year. This strong result came as a result as the diligent efforts of our operating teams, who drove the Novanta growth system deeper into our day-to-day activities, allowing the factories to drive productivity and better leverage their costs. Sequentially, our gross margins declined slightly as a consequence of disruptions with our logistic vendors, which required us to deploy short-term costly mitigating actions to ensure our factories were not disrupted. And to a lesser extent, the gross margin dilution from the ATI acquisition. Managing the supply chain difficulties and de-levering on our customer demand remains, sorry – delivering on our customer demand remains our top priority as a company and as a leadership team. We are seeing rapid inflation on electronic parts, largely caused by significant global shortages. But we also continue to see disruptions at our suppliers and our supplier suppliers around their own electronic part shortages, labor shortages, and COVID-related outbreaks. Overall, our manufacturing teams are doing an incredible job at mitigating these impacts. However due to the magnitude of the challenge, we’re working aggressively on sharing some of these costs with our customers in the form of price increases. We have announced meaningful price increases across all our business units, which follow this practice of sharing in the inflationary pressures. We expect the price increases will be phased in, but it’s important to…

Yes. Thank you. [Operator Instructions] And the first question comes from Lee Jagoda with CJS Securities.

Hi. Good morning.

Hey, Lee.

Hey, Lee.

So this, I think is the first time you’ve ever given out a backlog number in your release. And historically I don’t really think about this business as a backlog business. Can you talk about how far the backlog stretches out and how that backlog compares to the levels we saw pre-COVID?

So pre-COVID, I’ll start with it. It’s more than double any sort of level that we’ve had before. It is unusual for us to have backlog and it gives you a little bit of perspective to the supply chain disruptions that we’re seeing in the shortages. And it’s also why I gave a range where I said, it’s completely dictated by the supply chain and not by customer demand. It’s clear that even if we achieve the upper end of the range of that revenue forecast, we are still going to leave shipments on our docks, meaning that we still have some material shortages for the full year. So the demand environment is even stronger than the upper end of our revenue range for the full year. Yes. So in summary, I mean, the reason for including it is that we have, yes, we feel very good about our demand on our innovation and our design win structural long-term growth profile. Right. And so we wanted to support that with this backlog now.

Got it. No, that’s helpful. And then just one more for me related to the gross margins. If I look at the 100 basis point increase that’s, given in your guidance for 2022, are you able to kind of give a bridge of all the contributing factors holding back that gross margin that should be transitory, obviously some lasts a quarter or two if some may last a year or more. But just so we can get a sense for what gross margins could have been, had it not been for some of these transitory issues?

Yes. The way I kind of look at it without some of the logistics disruptions in the fourth quarter, we probably would’ve been above 45%. So there were some temporary like logistics disruptions. We, experienced, I do expect that to get continue into the first quarter, but then subside thereafter as we position inventory and different localities in order to deal with that. I think there’s obviously the UK Taunton facility, will have that cost structure in the fourth quarter. We’ll have that cost structure now going into the first quarter, but we’ll eliminate that in the second quarter. And so that will allow a second quarter to demonstrate a higher gross margin and probably get above that 45% level again. And then there was some supply chain shortages that we are seeing in the first quarter in the Vision segment. Those will subside as we get through the second quarter, and that will allow that, that third quarter, the jump up. And then of course the last one is price increases are now in effect across all business units. And so that really positions us as they phase in over the course of the year to really drive that a 100 basis points of margin expansion on the full year. What that really translates to is that you’ll see a higher gross margin in the fourth quarter, so will even run at a higher rate as a consequence.

Got it. Sounds good. Thank you.

Yes. Thanks Lee.

Thank you. And the next question comes from Rob Mason with Baird.

Hey, Rob.

Yes. Good morning. Thanks for taking the question. Maybe I’ll start just with the acquisitions they’re performing really well it seems out of the gate. Certainly was the case in the third quarter carried into the fourth. So, I didn’t get an opportunity really to tease out what the contribution would be in 2022. But could you clarify that, what your expectations are for acquisition contribution and maybe FX as well while you’re on topic?

So, we’re not expecting, well the FX rate that we’re forecasting, obviously we’re not experts on FX forecasting, but the FX that we have in the guidance is the FX that we’re currently at today. And so if there’s any sort of major shifts around that that could have implications to the, at least the reported numbers we’ve generally been able to naturally kind of hedge the profitability impacts of that, but there’ll be an impact on the revenue side. I would say that they, we haven’t guided, specific buy business unit for the two acquisitions. They are performing fairly well, and we expect them to continue to stay fairly robust throughout 2022. I’d be a little careful about run rating the numbers, but you can get kind of close using something directionally around that, taking into account that, we didn’t own the business completely in the third quarter. The fourth quarter numbers are a pretty good indicator of where things are at, probably for 2022. So maybe go from there.

Okay. Because the book, the orders, again still the orders in the fourth quarter above that level book-to-bill of one in the, over one in the acquisitions. What is the final purchase price now that we’re on the other side of 2021 with the…

We have to work our way through that though. There’s some disclosure language in the 10-K that you could take a look at around the actual earn out payment, it’s earn out calculations, we have it valued on a Monte Carlo basis. So, I did might probably direct you over to that take a look at the 10-K at this point.

Okay. And then just maybe last question you touched on your electronics, micro electronics exposure and that bookings, again, continued apparently to remain strong. And you have good visibility. I thought you said around Factory 4.0 demand in that space, continuing, but just in totality. Can you level that, where that business stands in terms of overall percent of revenue and again, how you’re thinking about it through the balance of the year and whether that visibility that you have in your backlog extends to that piece of the business?

Yes, I mean, historically the micro electronics exposure has between, 10% to 12%, that order of magnitude. So, we consider it to be in that range. I think what I was speaking to was actually the majority of the advanced industrial business, which is the dominant piece of that roughly 50% of our business. Right. And so we feel there’s a multitude of applications that are all driven by long-term secular growth drivers, whether it’s warehouse automation, whether it’s electric vehicle production, whether it’s applications that are driven by accelerated pays of investments in automation and robotics that are structural as well as a requirement to change your production technologies that are also laser based on whereas, we’re the laser the leader in steering, laser beams. So all these we see yes, tremendous tailwinds for the coming years. So that’s, so I would say that’s a multiyear cycle that we’re very excited about. And again, microelectronic is probably, as we all know is maybe the most cyclical of that, but we see for 2022 still a strong demand profile, again, around to 10% to 12% of sales or order of magnitude.

Got it. Okay. I’ll hop back in the queue. Thanks.

Yes.

Thank you. And the next question comes from Brian Drab with William Blair.

Hey Brian.

Hey, good morning. Thanks for taking my questions. You mentioned in the prepared remarks that you’d have some revenue limitation, I think in the first quarter associated with the facility move, can you quantify that possibly?

It’s two elements impacting the, the first quarter, one is the facility move and that’s really just impacting the cost structure more than anything else. So that results in a little bit higher cost. We have effectively shut down production for two weeks and then move everything over into the new facility. So, you have some stranded overhead costs that you have to deal with for that period of time that doesn’t get absorbed back. The other issue is tied to within the Vision segment. We have Fortune 500 vendor that unable to deliver enough product. They brought a new vendor online that new vendor will deliver them has been delivering them now, the components they need, but their ability to turn around the product in time to get it to us in the first quarter is limited. And so that’s really kind of the hampering of both the revenue number in the first quarter, as well as an impact on the gross margin. So, I would say absent those two things, you’re probably looking at a gross margin above 45%. And so as we get into the second quarter, at least two of those things are resolved and that helps you tick up in the second quarter. And then there’s actually price increases that have now been announced across all our businesses as of January 1. And those are going to be phased in as we go through final discussions with customers, but the receptivity from all the customers has been extremely positive.

Got it. So, I understand that there’s a gross margin impact, but isn’t there also a revenue impact from both of those shutting down the facility for a couple weeks and you don’t have product to ship on the second issue.

Yes. I mean, it’s probably in the low-single digit million. So, let’s say $2 million order of magnitude maybe. And then there is, the more significant piece is, is what Robert mentioned was the basically in Vision segment, this one supplier, which is a larger asset, both of which are timing issues, right? I mean, we’re accelerating this move on the Taunton site, to get into better shape quicker. But you basically originally we staggered kind of the, the bottleneck equipment. Right now, we’re just accelerating that move, which has a short term indeed capacity revenue, as well as trying to cost the impact. But those are old timing things. They’re not structural. Right. And just get us to the right position faster. Right. So that’s kind of how you need to look at the first quarter. It’s the temporarily impact by those things, but they will improve throughout the year. And again, we have just tremendous demand backlog situation. So it’s really not a demand issue. It’s really more of the ability to short-term supply issue.

Yes. Got it. Thank you. And then you talked about all the tailwinds that you’re seeing in the different advanced manufacturing markets additive, you mentioned all different Industry 4.0, but in the – I guess within Photonics and Precision Motion, like what’s, what are you seeing in the semiconductor and market now, there’s capacity additions that are coming out, is this a longer term secular tailwind here that, or at least for the next few years that you’re going to see, and what’s your exposure to semiconductor at this point? I know it’s a lot lower than it used to be.

Yes. So, again, I think Rob asked a similar question. So, I lump it altogether in micro electronics, right around 10% to 12%. So, it’s not substantially more than what it used to be in a matter of fact, also as a result of our acquisitions, our exposure towards let’s say, electric vehicle production, for example, and RAS automation is much higher. So, I think we’re diversifying that exposure, but nevertheless, we, of course, we benefit from yes, an increased and continued investment climate on the semiconductor side. Who knows how long this will take, as we’re also always a little bit cautious about that market, because the moment at all the capacities coming online, then yes, that the market will turn down versus these other markets we talk about, we think there is a decade long secular investment trend that will keep going because of fundamental underlying driver. So that’s kind of how we’re looking at it. We’re pleased with the micro electronics momentum for this year for sure. And but we’re even more excited about all these structural automation and robotics related markets that our actually have a much larger exposure to the – in the company and where we feel we’re very well positioned, both from being there as well as through increased innovation. So, that’s where we focus our expansion predominantly.

Okay. Yes. Sometimes I get a little bit that the micro electronics category so broad, and includes so many things, is the – can you quantify your pure semiconductor exposure today? And is that around like 5% today thereabouts

Probably. Yes. Order of magnitude. Yes.

Okay. In the ballpark. Okay. That’s helpful. Thanks a lot.

Then again let’s say if you look at, let’s say a large chunk is driven by, 5G, cloud-based infrastructure, high speed networking, even in mobile phone devices, all these also include micro electronics. Right. So, I just want to be clear that some of these drivers are actually similar, and which is why we’re lumping them together.

Right, right. Got it. Thank you very much.

Thank you. [Operator Instructions] And the next question comes from Andrew Buscaglia with Berenberg.

Hey guys.

Hey, how are you doing?

Yes, good. Thanks for taking my question. So book-to-bill, you said was strong in each segment, and you had some interesting commentary around each segment with regards to the underlying demand. I’m curious, which – can you go deeper into that comment or provide more details about that? I’m just curious how they compare across each of the business segments?

Yes. I mean, I can give it a shot and I think Robert, characterize it well. But if you start with Vision, right, demand drivers were a little bit subdued there because of minimally invasive surgery procedures short-term, but long-term, we feel very good about the long-term growth drivers in that business. I think the prime – we see orders coming in through nicely already in that segment that will further support that. I would say it’s fair to say that probably most near-term demand and as well structural demand we see is in our robotic surgery, DNA sequencing side on the motion – Precision Motion side, as well as warehouse automation, electric vehicle production. And in the Photonics side, we listed a whole slew of automation-enabling applications that are driven by again, robotics and automation, Factory 4.0 like laser additive manufacturing, electric vehicle, a battery production, a category called micro-machining, which is really being driven by a trend of monitorization, and making smaller features and smaller form factors using a very precise laser based technology. So all these, and even via hole drilling as well, driven by 5G and, cloud-based and infrastructure and networking and investments. So those are kind of high level, I think all those markets we feel have a structural tail wind that includes multiple years of expansion, which is what we’re seeing. And I think on top of that, a leading indicator that we’re providing is design wins. And so we did comment on our excitement in the minimally invasive surgery segment that while shorter, maybe elective procedures demand is subdued. There’s two things that really excite us one is, of course, these procedures will rebound because there is a pretty big patient backlog, but even more fundamentally, we’ve won some very big customer platforms…

Yes, no all that sounds great. So maybe kind of switching to the other side, like the supply challenges or supply chain challenges, what you want to call I’m curious, it sounds a little bit specifically called it out and went through each segment, kind of like where you’re seeing this, I guess what’s changed the most to you, I guess, in the last three months that you sound easy, sound a little bit more cautious, maybe around issues that your customers are seeing in terms of their ability to move things along to before they implement. Yes. I guess we change the most the question.

Yes. Let me comment on that. I don’t think, I think, well, first off, the electronic materials, which are basically semiconductor chips and interconnects are in short supply. There’s an enormous amount of new supply coming online and there’s just a transitory nature of how that rolls back into the supply chain, right? So the fourth quarter and the first quarter probably the fourth quarter was, and the first quarter will be probably the more difficult quarters to deal through that. But I think as you get into the second, third and fourth quarter, things are actually begin to free up, and will look a lot better from supply perspective. We see that with some of our largest vendors, some of vendors we do business with are $20 billion, $30 billion, $40 billion in size. And so they’re putting capacity online and they’re getting, and they’re solving for some of these issues to get us that continuity of supply. It just, there’s a little gap effect that takes place, which you see in the first quarter. So, I wouldn’t say we’re necessarily more negative on it than we were before. We’re just more cognizant that there’s a bigger transitory effect of it happening in the fourth quarter and happening in the first quarter. The fourth quarter, we would’ve been able to mitigate most of that, but there was some logistics disruptions that occurred. And then we’re also trying to carry a new manufacturing facility – completed. So, it’s a little bit of a few things happening at the same time, but the teams have worked really well to work their way through that. So, we feel very good about our ability to start expanding the margins as we get back into the second, third and fourth quarters. And I think that’s what you’ll see unfold as the year progresses. We don’t have a demand problem. Right. And I think that’s what the comments is that I think we’ve been trying to articulate. Our demand far outstrips, even the guidance that we have out there. And so we feel pretty good from that perspective. So it’s really just kind of boiling, and hunkering down on working through these short-term disruptions. So that we can get that supply in. And for us, the big benefit is our customers partner with us in that effort, they partner with us in the form of sharing some of the cost, but they also partner with us in helping solve these problems. So it’s temporary and time and related, and it’s not structural. Right. So that’s kind of the key takeaway, and we see improvement as we continue to expand into the year.

Yeah. So maybe things gradually get improved, but it sounds like your guy is really not embedding a whole ton of improvement, but to be prudent. But…

I think we’re just being conservative right now. We have additional levers, we haven’t forecasted elective surgical procedures to rebound significantly to drive additional demand. That is more likely than not. But given that there’s been some disruptions with variance. It’s not prudent for us to bake that into our forecast yet. And I think being a little bit more conservative on the gross margin expense is the right thing to do in this environment. But it’s not something that obviously our internal plans would demonstrate.

Yes. For example, the Omicron variant impact on hospital procedures was, of course, I don’t think anybody would’ve predicted that. Right. So it was much larger and all major medical OEMs were kind of set back by that as well, temporarily. So again, fundamentally this will resolve itself, but it’s still a little too early to kind of give all signs clear. So that’s a bit prudent in that area.

Yes. Okay. Fair enough. Thank you guys.

Thank you.

Thank you. Thank you. And this concludes our question-and-answer session. I would like to turn the conference over to Matthijs Glastra for any closing remarks.

Thank you, operator. So to summarize, 2021 was a landmark year for Novanta we had all time highs for sales, bookings, and profit. We exited 2021 at an $800 million revenue run rate with a record backlog close to a $1 billion full year bookings. We close two new acquisitions, which are performing very well with strong engagement from their local teams. We stole record growth and design wins, and our innovation programs are healthy and progressing despite some minor delays. And we achieved all of this despite some tremendous disruptions in global supply chain. And we just talked about that all of which are our teams are fighting hard to manage every day. And we’re excited to see the continued strength and recovery in the global economy, in the advanced industrial sector, and also in the medical sector. Novanta is extremely well positioned in these sectors with diversified exposure to long term secular market trends and robotics and automation, precision medicine, minimally invasive surgery, and Industry 4.0. In closing, I would like to thank again, our customers, our employees, and our shareholders for their ongoing support, and very grateful for the resilience and strong contribution of our teams have committed Novanta employees who are working so hard to mitigate the shortages, and the challenges we appreciate your interest in the company, your participation in today’s call. I look forward to joining all of you in several months on our first quarter 2022 earnings call. Thank you very much. This call is now adjourned.

Yes. Thank you. As mentioned, the conference has now concluded. Thank you for attending today’s presentation. You many now disconnect your lines.