Good morning. My name is Dorvin, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc. Second Quarter 2024 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 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 second quarter 2024 earnings conference call. This is 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, 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 Chair and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning everybody, and thanks for joining our call. Novanta delivered another quarter of outstanding operating results in the second quarter of 2024. Our teams delivered revenue, profit and cash flow performance above our expectations and prior guidance in a challenging market environment. For the second quarter, we delivered $236 million in revenue, which beat our previous guidance and represents reported growth of 3% and a decline of 5% on an organic basis. Adjusted gross margins were 47% as core businesses expanded margins by over 100 basis points year-over-year, offsetting the dilutive effect of the Motion Solutions acquisition. Adjusted EBITDA was $51 million beating our expectations and prior guidance. Operating cash flows was very strong for the fourth straight quarter at approximately $41 million, which represents 57% growth year-over-year. This operating performance reflects excellent execution by our teams in a difficult market economic environment. The sticky Novanta business model with diversified exposure to long lifecycle customer platforms in secular high growth markets has proven resilient, under multiple geopolitical and market economic scenarios. Our proprietary technologies are well-positioned in medical and advanced industrial applications with long-term secular tailwinds such as Robotics & Automation, Minimally Invasive & Robotic Surgery and Precision Medicine. At this time, we see the following themes in our end markets. Overall, we're seeing improving momentum in our business, but with mixed visibility depending on the end market. Medical device technology markets continue to be robust and appear likely to stay strong all year and into 2025. The life sciences markets including precision medicine applications are experiencing more prolonged weakness in capital equipment demand by our customers and their customers than previously expected. This is being reported on by many other major players. Although signs of a recovery materializing are certainly there, we expect it to…

Thank you, Matthijs, and good morning, everyone. Our second quarter 2024 non-GAAP adjusted gross profit was $110 million or 47% adjusted gross margin compared to $108 million or 47% adjusted gross margin in the second quarter of 2023. Adjusted gross margins were roughly flat year-over-year. Excluding the impact of Motion Solutions acquisition, our adjusted gross margin was up roughly 100 basis points, in line with expectations. Our gross margin expansion continues to be largely driven by the Novanta Growth System deployment in our factories and our commercial teams. With the second quarter, R&D expenses were roughly $24 million or approximately 10% of sales. Second quarter SG&A expenses were approximately $45 million or 19% of sales. Adjusted EBITDA was approximately $51 million in the second quarter of 2024 or a 22% adjusted EBITDA margin versus $52 million in the prior year. On the tax front, our non-GAAP tax rate for the second quarter of 2024 was 20%. Our tax rate remains on track to our estimate of 18% for the full year. Our non-GAAP adjusted earnings per share was $0.73 compared to $0.80 in the second quarter of 2023. Our EPS growth remains muted due to higher interest rates on a higher debt balance. Second quarter operating cash flow was approximately $41 million compared to $26 million in the second quarter of last year, an increase of 57% year-over-year. We are pleased with the improvement in cash flows and expect to continue this momentum by rigorously managing our net working capital and driving strong operating profits. We ended the second quarter with gross debt of $485 million with a gross leverage ratio of approximately 2.4 times and our net debt was $387 million. We remain on track to reducing gross leverage to 2 times or below by year end. I'll now…

Thank you very much. [Operator Instructions]. The first question comes from Lee Jagoda from CJS Securities. Please go ahead.

Hi, good morning guys.

Good morning, Lee.

I guess to start on the life sciences bioprocessing space, can you give us some more context around what gives you the confidence that things are kind of turning? I know you had mentioned not going to turn till '25, but things are kind of turning. And then obviously, when you bought Motion Solutions, it gave you a head start into some of the secular trends that you're hopeful will materialize over the next several years. What are the other tools that you're still looking to acquire to kind of bolster that position further?

Yes, Lee. What we're seeing is basically our customers' customers are starting to order basically the consumable parts of the business, which means that the activity is improving in this space. It's just the capital part of the market is just not yet improving. And we actually see that double dip weakness that we talked about. But as you can see, multiple of our customers are actually talking about an improving climate, albeit not as rapid as people expected, but it's incrementally improving on the non-capital side. And we feel that is a leading indicator for the capital side. Therefore, we feel in 2025 that, we will be an improving outlook, of course, the timing of which is a bit uncertain. We are looking though, just to structurally manage our business through the cycles. And also, we'll introduce new products and gain new customer slots and further expand the Motion Solutions business. We're positive about the space in the medium-term.

And then, I would add to that. I think, Lee, as you think about all this stuff is associated with capital equipment launches by our customers or capital equipment they're selling into the marketplace. That's obviously going to have some interest rate sensitivity. An improving interest rate environment in the back half of the year and into 2025 actually gives us greater confidence that you'll see a faster return. In addition to most of the drugs being launched into the U.S. and European markets are based on biologics and biologics require these new types of technologies, including the genomics, proteomics and other types of multi-omic-based technologies that you hear a lot of our customers talking about.

Great. And then, gross margins were ahead of expectations and expected to be ahead of expectations. Are there specific drivers of that improvement? And is any of that a pull forward, meaning should we kind of temper our expectations for margin expansion next year? Or, is everything continued to be on track?

I think things continue on track. We were anticipating driving 47% gross margin. We are on track to accomplishing that despite the dilutionary impact of Motion Solutions. As we get into next year, we're still continuing to expect to drive robust internal gross margins, -- gross margins. Obviously, Motion Solutions growth characteristics could have a dilutive impact on that for one final year. But overall, I think the business is on a strong track for 2025. It is being driven by the Novanta Growth System. We're driving that deep into our different business units. We're driving productivity improvements in our factories, material cost downs with the products that we sell to our customers. In addition to that, we have captured some price. We're not expecting to lose any of that price as we get into 2025. And we see additional opportunity to decrease our operating footprint to drive additional benefits there. We feel pretty good that we have this pathway to continue to improve gross margins, eventually driving it up to that 50% level. Everything remains on track, and I think the last couple of years demonstrates that.

Sure. And then, one more quick one for me if I can. Just, Matthijs, I think in your prepared remarks, you've mentioned the $50 million incremental opportunity from new products in 2025. I don't know, if it's semantics or not, but I think prior it was the $50 million from the insufflation product lines. Is there any change there?

No. I think we've been pretty consistent, and I realize there's been some confusion. I mean, we have said that there was the gross number of $50 million for the minimally invasive surgery product line that includes insufflation. But there's another $50 million which I spoke about in this script, which we have been speaking about in the last, I would say, four to five earnings calls, which is the total revenue from new products, the incremental total of new products revenue is $50 million. So that is net of any end of life of all the products generating. So that is really incremental to Novanta's product offerings. And so, it's the absolute amount of revenue from new products we will realize next year. It's not though the year-over-year variance, right? So just to be clear, because we realized that maybe there has been some confusion there. Hopefully, that's clear. And of course, some of this benefit is happening already in '24 because some of the products are ramping right now, right, as we shared in the prepared remarks. But the larger impact will be, of course, in 2025 because, a, the ramps are further progressed, and b, we of course have the full year effect of these ramps. Hopefully that is clear. It will of course include smoke evacuation. Inflation is a large driver, but it's not the only driver, which is why we're excited about it. It's much more of a broader set of new products contributions that are included in that incremental $50 million total revenue.

Great. Thanks, very much.

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

Hi, thanks for taking my questions. If I had just listened to the comments on the call, so much detail from Robert. I might have been left with the impression that guidance changed quite a bit, but I just want to make sure I have this right. The beginning of the year, the initial guidance was $975 million to $1 billion for revenue, midpoint like $987.5 million and you are moving away from $10 million in revenue from the display business, which would take the midpoint, if I was just using midpoint to $977.5 million. And now today, we're at $975 million. Is that right way to think about that? I know there's so many other moving parts, but am I missing anything with that display adjustment?

Yes. I think the easiest way to think about it is, there's $10 million lower Motion Solutions and then there's also an element of the display business. So, in the Motion Solutions, it's $10 million less because the precision medicine end markets, life science tool end markets are not materializing the way that customers had anticipated. It is fair to say that, we gave a guidance range, which I talked about $975 billion to $1 billion and we're at $975 million right now. So, the bottom end of the range based on the fact that, the life science tools are taking a little bit of a double dip in the back half of the year. And that's most representative in our Motion Solutions business. There's, of course, a little bit of a dilutionary impact from the display business. At the same time, we're getting stronger growth in the inflators that are being launched in the back half of the year. And so, there's a minor offset to that discontinuance of that product line. And then I would also emphasize that, from a profit perspective, we're above where we were kind of on the higher end of the range that we provided at the beginning of the year. So, from a pure profit, the businesses are doing a good job to drive that stronger gross margin that's flowing down to a much stronger EPS and then obviously a strong cash flow as well.

I mean, the EBITDA margin barely changed and you took the low end of the EPS up, I see that. I guess at the beginning of the year, maybe, the aspiration is obviously to get to the high end of the range. And then I think your comments were, if things get worse, so then maybe we get to the low end and it's kind of, things got a little worse in life sciences than everyone expected. But still no major changes.

Yes. It's just the capital equipment piece, I would say. So, it's as -- has talked about, there is -- if you listen to the earnings calls of the people in the end market, they're all talking about a lot of pickup in activities there. But if you dissect it, it gets into the assays and services, the consumables associated. So effectively, activity in the labs and activity in the manufacturing space has increased in the back half of the year, and now it's just about when does the capital start turning on. Part of that is as you introduce new drugs and part of that is an improving environment increases the utilization requiring and a capacity expansion.

Okay, thanks. And then clearly, some of the more impactful upcoming product launches or current product launches are in the MIS business, in that end market, which is doing really well. But are you seeing any risk to any of the new product launches or timing related to some of the macro?

Yes. I think, listen, there is -- we spoke about some pluses or minuses in the past. Of course, you see certain customers being impacted by the macro and they're pushing things out and certain other launches are running a little bit better-than-expected. Right now, the average we feel is right there where we want to be. And I think the diversification of the amount of products that we're launching is also helping. But, yes, I mean, listen, there are, you can clearly see that the certainty has not improved macro rise in, let's say, the last few weeks months. So, yes, that might have an impact on timing. Right now, we're not seeing this. As we're sitting here today, our customers are still on average kind of tracking to that, and that's why we're reconfirming that number.

And to be fair, I would just say that the bulk of the new products in the back half of the year associated with the minimally-invasive surgical business. So, it's associated with more of the insufflators and other types of products going into the OR suite.

Right. Got it. And, I'll accept a no comment on this, but I'm just going to ask it. As you look into 2025 and you think about the new products and you're going to be exiting the year, you said again a double-digits organic revenue growth. Can you just comment on how visibility you have to that double-digits organic revenue growth persisting into 2025?

Yes. I think you're very astute that, if you're growing at a double-digits in the fourth quarter, you kind of run rate that forward, then it's tough to see how you wouldn't at least deliver about a 10% growth in 2025. I think, that's -- we would say as we sit here today, given the uncertainty in the different environments and then recovery rates and so on and we feel pretty good regardless of that about 10% in 2025, but I think we will continue to monitor and get back to you over the course of the year, as we see how the life science tool market unfolds, how the industrial recovery happens and if there's any other disruptions that occurred due to geopolitical factors in the marketplace.

Okay. Thanks, very much.

Thank you. We have the next question from Rob Mason with Baird. Please go ahead.

Yes. Good morning. I understand this question could be at the risk of asking you to repeat yourself. Could you walk through again just, what would the major peaces that drive the sequential increase in revenue in the fourth quarter versus the third quarter that we should be looking for?

Yes. So, I think if you look at the individual segments, if you're going, one of the drivers of the increase, maybe that's the easiest way of looking at it, is we got precision medicine and manufacturing up high single-digits, robotics & automation up mid-single-digits and medical solutions up low double-digits. So obviously medical solution will be the solutions will be the larger element of it. So, if I summarize it, the sequential uptick is really new product introductions, which the largest segment of which is materializing in the medical solutions area, continued strength in the medical device demand, which is around hospital capital spending, which is for the large part remains on track. So, the backdrop of new products going into a very strong hospital capital spending market around the OR based technologies. And then continued strength in the robotics & automation and even a little bit of microelectronics we are seeing some order book strength there. And then if you go back and look at the bookings, the bookings somewhat support that now that robotics & automation up high single-digits sequential improvement is supported by a stronger book-to-bill that's expected to maintain as we get to the back half of the year. And then similar to medical solutions, despite having a step down on the precision medicine side, there's a step up on the hospital capital spending. And so, that's all kind of supported by that. We have factored in the double dip in life science tools and the weaker industrial outlook, but obviously, we can't factor in if the macro environment falls off a cliff. So, what we can feel confident of is that, we can maintain the profitability outlook for the full year. And we have a lot of nice moving parts that come with new product introductions in the right spaces at the right time. And so that's where you see the largest step-up happening.

That's helpful. And then just, you noted the Robotics & Automation bookings did accelerate sequentially. Can you pull that apart a little bit as well? Just how much of that sequential acceleration in bookings was related to the medical portions of that business, relative to the industrial and maybe even relative to the microelectronics piece sequentially?

Yes. I can take that, and then we can -- Robert will further add to it. Listen, I mean, within that market, you see puts-and-takes. Of course, the medical side continues to be solid. And on the other side, of course, and I think many players have reported on that, just a very slow automotive and EV battery environment. And we're seeing that as well. But what we're seeing as well is, kind of in other industrial robotics markets, some sort of momentum, so humanoids, warehouse automation, but also momentum from recently-launched products. So that's kind of what we're seeing, and those are kind of the drivers of the growth that Robert talked about. And Robert, I don't know if you want to further add to that.

Yes. No, I think that's a good characterization. So solid medical, actually pretty decent semi/microelectronics, and then an impact or an uptick in kind of the smaller robotic space. Whereas, the offsets would be big industrial robotics, down in automotive, down in EV, down in battery. But the net, net of that is the other areas are growing stronger. Now they benefit from the fact, as Matthijs said, that, there's new products happening in the same exact space.

Okay. And maybe just one last question there. Remind us again what portion of Robotics & Automation is industrial versus medical?

Actually, we've never gotten into that breakout before. I will -- and I understand you've asked that question before. It's a good question. I will have to get back to you on how we do that in a consistent manner. Let me get back to you on that.

Okay. Thank you.

Thanks, Rob.

Thank you. 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. To recap, Novanta had outstanding operating performance in the second quarter. We beat expectations for sales, margin, profit and cash flows, and we made great progress on our top priorities. This came despite some challenges and near-term softness in some of the end markets we serve. We see our business improving sequentially, and we continue to expect accelerating momentum for Novanta on the back of our new product launches. We also made great progress in integrating the Motion Solutions acquisition, which will be an attractive long-term growth platform for us. Novanta remains well-positioned in the medical and advanced industrial end markets with diversified exposure to long-term secular macro trends in Robotics & Automation, Precision Medicine, Minimally Invasive Surgery and Industry 4.0. We're excited for the large product launches starting over the next few quarters. We will continue to focus on additional design wins in high-growth applications, as well as doubling down on the Novanta Growth System to continue to drive strong cash flows and gross margin expansion. In closing as always, I would like to thank our customers, our employees and our shareholders for their ongoing support and 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 make the company a great place to work. And we appreciate your interest in the company and your participating in today's call. I look forward to joining all of you in several months on our third quarter 2024 earnings call. Thank you very much. This call is now adjourned.

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