Good morning. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Incorporated First Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Thank you very much. Good morning, and welcome to Novanta's first quarter 2024 earnings conference call. I am Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley. If you've not received a copy of our earnings press release issued today, 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, 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 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 Chair and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered great operating performance in the first quarter of 2024. I'm very pleased with how our team delivered revenue, profit and cash flow performance above our expectations in a dynamic market environment. For the first quarter, we delivered $231 million in revenue, which beat our previous guidance and represents reported growth of plus 5% and a decline of 4% on an organic basis. Adjusted gross margins were at 46%, which was slightly up year-over-year as our core businesses expanded margins by nearly 200 basis points year-over-year, which more than offset the dilutive effect of the Motion Solutions acquisition. Adjusted EBITDA was $50 million, beating our expectations and prior guidance. Operating cash flow was very strong for the third straight quarter at approximately $33 million, which represents more than 200% growth year-over-year. This operating performance reflects excellent execution by our teams in a challenging macroeconomic environment. The sticky Novanta business model with diversified exposure to long life-cycle customer platforms in secular high-growth markets has proven resilience under multiple geopolitical and macroeconomic scenarios. Our proprietary technologies are well positioned in medical and advanced industrial applications with long-term secular tailwinds such as robotics and automation, minimally invasive and robotic surgery and precision medicine. In the first quarter, the broader end market themes were consistent with what we saw at the end of 2023, namely that medical technology markets continue to be robust, whereas life sciences and advanced industrial markets remain subdued due to the interest rate and regional economic challenges. Microelectronics remained stable at a lower level with some early signs of green shoots gradually appearing. As a result of this, our view of customer demand for the full year is consistent with what we said in our last earnings…

Thank you, Matthijs, and good morning, everyone. Our first quarter 2024 non-GAAP adjusted gross profit was $107 million or a 46% adjusted gross margin compared to $101 million or 46% adjusted gross margin in the first quarter of 2023. For the quarter, adjusted gross margins were up 35 basis points year-over-year. Excluding the impact of the Motion Solutions acquisition, our adjusted gross margins were up roughly 200 basis points. Our gross margin expansion continues to be largely driven by the deployment and successful adoption of the Novanta Growth System productivity tools in our factories and in our operating teams. For the first quarter, R&D expenses were roughly $23 million or 10% of sales. SG&A expenses were approximately $44 million or 19% of sales. Adjusted EBITDA was approximately $50 million in the first quarter of 2024 or 22% adjusted EBITDA margin compared to $47 million in the prior year. On the tax front, our non-GAAP tax rate for the first quarter was 16%. Our tax rate is typically lower in the first quarter but remains on track to our estimate of 18% for the full year. Our non-GAAP adjusted earnings per share was $0.74 compared to $0.74 last year. Our EPS growth remains muted due to both higher interest rates and higher debt balances from the Motion Solutions acquisitions. First quarter operating cash flow was approximately $33 million compared to $10 million in the first quarter of 2023, an increase of greater than 200% year-over-year. We were pleased with the improvement in cash flow and expect to continue this momentum by rigorously managing our working capital and driving strong operating profits. We ended the first quarter with gross debt of $517 million with a gross leverage ratio of 2.6x and our net debt was $424 million. I'll now turn to an…

[Operator Instructions] Our first question today is from Lee Jagoda with CJS Securities.

Just on the products you're exiting, are you freeing up additional capacity, or is there other reasons why we're end-of-lifing those products now?

Yes, I would say it's -- not only does it increase capacity from an operating model perspective, meaning the manufacturing team's ability to execute on it, but it also frees up capacity from an engineering support perspective. And so it really solidifies our ability to execute on those launches in the back half of the year and gives us the utmost confidence that we can get those executed on time and meet the customers' expectations, particularly given the demand environment remains relatively strong on the medical side.

And I guess drilling down into the new product launches in the back half. Can you speak to the variability that we should expect in the model, and how much of that is within your control versus a reliance on your customers in terms of their launch dates?

Yes, I mean, listen, what I said in my prepared remarks is that, let's say, on the overall, we feel we're on track on our product launches. Now, if you look and drill down on the individual product launches, there are some pluses and minuses. Some are being pulled in and are ahead of schedule. Some are a little bit delayed. But on average, we feel very good. And the delays are primarily linked to customer timing. But I would say overall, if you average it all out, we feel good about where we're ending up at the company level.

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

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

The next question is from Brian Drab with William Blair.

I first just wanted to ask, given we have a full quarter of MOSO in the numbers here, the OpEx came in a little bit below where we were modeling it, like $67 million. Is that kind of a somewhat steady state number? Or how can you help us model OpEx going forward?

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

Okay. Was there anything unusual in the first quarter may be related to the acquisition or integration or anything that would have hit OpEx that is not going to later?

Well, OpEx was $67 million in the first quarter. We're predicting, let's say, something closer to $69 million in the second quarter. There's nothing specific to the Motion Solutions business. It really is an R&D investment, difference that really is oriented towards those new product launches.

And related to the new products, I think you changed the language here today. Maybe you've said it this way in the past, but you said greater than $50 million. I believe, today, is that a change in language around your expectation for some of these new products, platforms?

Yes. I mean, what we said is that the incremental revenue in 2025 is $50 million or more, which is for Novanta overall, and which is net of, let's say, any cannibalization or, let's say, end-of-life effects, right, of other products retiring as a result of these new products. So that's what we said, and that should signify a confidence in the momentum we have. And these are multiple product launches across multiple businesses with multiple customers. So we feel also good about the diversification of risk, right? We're not betting on a single product with a single customer here. So it's pretty broad.

Okay. And then Lee asked it already, I think, to some extent. But you're formally not mentioning anything really about the full year guidance that you gave previously. But I guess, is the statement just we already gave guidance and we haven't seen the environment change that materially, and just look at what we said before. Or is there anything that's reduced visibility at all in the second half that has you communicating this way today?

Yes, I would say from a macro or kind of industry-specific kind of visibility, I don't think anything has materially changed from what we gave the guidance back in February, right? So I don't -- as we look at the full year, it's still too early to say there are things that we would do to make adjustments for the full year. I think we'll get into the second quarter and we'll have greater visibility in the back half of the year, particularly our ability to execute on those new product launches. And there's some reasons to be optimistic. It's one of the reasons why we're exiting roughly $10 million of business early so we can get prepositioned for that and make sure that we have a more successful launch around those products. But nothing's changed. So I would say look at what we said in February and we would reiterate what we said in February.

The next question is from Rob Mason with Baird.

One of the common refrains is we've gone through this earnings season from component suppliers, companies like yourself has been that OEM inventory levels have been slower to come down maybe than expected taking longer. I'm just curious how you're seeing the OEM inventory levels of your customers right now, your level of visibility into that and what kind of pace you think they're on to get where they need to be to trigger more order activity?

Yes, so I mean, one of the things I'd start off with saying is that for our business specifically, our OEMs typically don't hold a lot of inventory. We sell as part of their supply chain, as a vendor into their supply chain, and the majority of business that we do with them is a just-in-time type of setup. So the inventory commentary that's coming out there where there might be too much inventory in the value stream is really associated with their customers. Those are commentary that you see more prevalent, obviously, in the semiconductor markets, which is manifest in our numbers, and more prevalent into the industrial side of the business, specifically things tied around the robotics industry. We have a more difficult time seeing through our customers to see how much inventory is out there in the chain, but I would just say, generally speaking I don't think things have changed from when we gave the guidance back in February. That visibility has still been the same, and the trend lines have been very similar to what we were anticipating unfold as we got into this first half of the year now.

Yes, and the thing that I would add, Rob, is that it's very end-market dynamic dependent. As Robert clearly gave some color per end market, I would say medical device is very strong, right? So across the chain, not a lot of inventory, right? Industrial is different, right? So I would add that color.

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

Yes. I mean, these signs are very early. I mean, we just see bookings normalization, right, and improvement there. And therefore, as some customers, not everybody, but some customers gearing up for a better second half. But it is segment-specific, customer-specific, so it's not an across the board. And that's why we said, we see initial green shoots, right? It's not everywhere. But you see basically for some of our businesses that a bottom has achieved, and you see a booking sequentially improving from here, which is what you saw in the robotics and automation segment, where the majority of our MicroE exposure is.

Just as a last question, just to want to be clear, on the end-of-life of surgical displays or the exit from that, as you, again, continue to work with your customers on that, will there be any tale of that, that carries over into 2025? Should we think that incremental step down is complete by year-end?

Yes. Most of it should be done by the second quarter. So I would say that whatever revenue we have in the back half of the year is immaterial for the total company. So we're really stepping it down. We ship out what we could in the first quarter, and we'll step it down hard. And then it's largely -- it's no longer in our numbers in the back half of the year, for all intents and purposes.

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 recap, Novanta had a strong start of the year. We beat expectations for sales, margins, profit, and cash flows, and we're making great progress on our top priorities. This came despite some challenges and uncertainty in the end markets we serve. We also make great progress in integrating the Motion Solutions acquisitions, which will be an attractive growth platform for us. Novanta remains well positioned in the medical and advanced industrial end markets with diversified exposure to the long-term secular macro trends in robotics and automation, precision medicine, Minimally Invasive Surgery, and Industry 4.0. We're excited for the large product launches starting later this year, and we will continue to focus on additional design wins in high growth applications, as well as doubling down on the Novanta Growth System to drive strong cash flows and growth margin expansion. In closing, as always, I would like to thank our customers, our employees, and our shareholders for their ongoing support. I continue to be especially grateful for the dedicated efforts of all of our Novanta employees who work diligently every day, taking on new challenges, and striving to make the company a great place to work. We appreciate your interest 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 2024 earnings. 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.