Novanta Inc.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good morning everyone. My name is Jimmy and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated First Quarter 2021 Earnings Conference 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 Please also note this event is being recorded. At this time, I would like to turn the conference call over to Ray Nash, Corporate Finance leader for Novanta. Sir, please go ahead.

[Ray Nash:]

Thank you very much. Good morning and welcome to Novanta's first quarter 2021 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.

[Matthijs Glastra:]

Thank you, Ray. Good morning everybody and thanks for joining our call. Novanta delivered outstanding results in the first quarter of 2021. Our teams executed very well and we delivered above our expectations for revenue, profit and cash flow. We delivered all time highs for revenue and bookings and excellent operating performance with adjusted EBITDA growth of 18% and free cash flow growth of 30% year-over-year. Our company delivered approximately $163 million in revenue representing 5% year-over-year revenue growth on a reported basis and 1% growth on an organic basis versus a strong first quarter of 2020. This is the highest ever single quarter sales for Novanta which comes from the strength of rebounding markets and exceptional execution by our teams as I'll speak to momentarily. We are extremely pleased with how our teams drove exceptional operating performance using the Novanta growth system tools. In the first quarter we expanded adjusted the EBITDA margins by 200 basis points year-over-year to an adjusted EBITDA of $33 million, or 20% of sales. Adjusted diluted earnings per share was $0.58, which is up 14% versus 2020. And our team's delivered strong free cash flow performance in the first quarter of 2021 of $20 million, up to 30% year-over-year at a ratio of over 175% of GAAP net income. All-in-all very strong results.

[Robert Buckley:]

Thank you, Matthijs, and good morning, everyone. I'll start by giving some details about the performance of our operating segments. Starting with our photonics segment, for the first quarter of 2021, our revenue was up 6% year-over-year, and up 16% sequentially from the fourth quarter. This strong performance reflects the rebound in advanced industrial applications, which is giving us confidence and a positive outlook for this segment for the remainder of 2021. Throughout the first quarter and now also into April, May we have seen significant booking activity from our customers indicating further growth in the applications which we serve.

[Operator:]

Ladies and gentlemen will now begin the question-and-answer session. The first question today comes from Lee Jagoda from CJS Securities.

[Lee Jagoda:]

So I guess it sounds like within your guidance for the year, you're basically saying that demand is outstripping supply with the headwind being the supply chain. And some of the shortages you're seeing in certain products, if it weren't for the headwind of supply chain, and you were actually able to produce to demand, how does that change the or how would that change the revenue guidance given the top-end now is implying roughly 10% or 11% year-over-year growth for the full year?

[Robert Buckley:]

Yes, so I would say it obviously, what we gave in our prepared remarks is that, the upper end of the range is where we're seeing demand currently. And in fact, bookings continued at this pace will probably exceed that number from just a pure demand profile perspective. So it would say that, not only is our supply chain, but the supply chain of our customers is really kind of governing the growth right now.

[Lee Jagoda:]

Okay. And then just the same kind of question around margins, you're saying, these 150 or 200 basis points of -- 150 basis points plus of gross margin expansion expected this year? How much you think that's being held back by supply chain issues? And either inflation or just the inability to get supply?

[Robert Buckley:]

I would -- the 150 basis point expansion is driven net of all those things. And so effectively, what you're trying to get at is, could you expand margins higher, the short answer is yes. That they would go up higher than that, absent those effects. I don't want to get into kind of specifics, but it is certainly our ability to continue to expand above that level, is currently there, it's just dealing with these changes, were a little reluctant to go out there and get over the end of our skis.

[Lee Jagoda:]

Yes, that's fair enough. And I have one more, and I'll hop back in queue. If I look at the bookings numbers, is any of that? Or can any of that be attributed to customers front-end loading bookings because they're either scared that they can't get supply or are just over ordering? And if that's the case, are you able to kind of lock them into terms that are more favorable to you, just in case things get delayed or cancelled along the way?

[Matthijs Glastra:]

Yes. Lee, at least in our case, we don't see customers front end loading, we really see the industrial side coming off pretty soft, last three years, right with trade wars and then COVID. So you really see economies really opening back off and particularly industrial customers, yes, seeing the demand and seeing that activity. So we don't see any general kind of build up or anything. On the medical side, I think it's fair to say that orders are coming in. But we do expect that order pattern to actually continue as well. And let's say the remainder of the year. So in short, we don't really see the kind of front end loading now. When shortages continue, we're taking a very critical look, we're very close to our customers, we know what the inventory levels they're sitting on. And rest assured we will not let that go out of control.

[Operator:]

Our next question comes from Richard Eastman from Robert W. Baird.

[Richard Eastman:]

Maybe a little bit of conversation or discussion, maybe just around the cadence of orders to revenue in the vision business. And is that, how do you feel about that? I think you referenced that maybe the second quarter in might be still a bit softer, year-over-year. But then we see growth in the back half of the year. And is that just to speak to the cadence there of orders for revenue recognition, if you would?

[Robert Buckley:]

Yes. I mean, listen, I think there we have seen in parts of our vision segment we have seen a little bit more challenging, let's say areas for supply. And so that that impacts some of the sequencing overall, I think the orders do reflect I think a positive outlook of our customers. And also, we've commented in the past that is single quarter order pattern can sometimes be a little bit lumpy. So I would say those three effects, I think they feed into what you're seeing in terms of findings of bookings versus revenue. So, if anything, it gives us a good, let's say confidence that vision will pick up in the second half of the year.

[Richard Eastman:]

Was there growth in the consumables piece of vision versus the equipment side? Is it still the equipment side that's down meaningfully?

[Matthijs Glastra:]

Yes. We didn't comment on that. I would just say that the remarks that renewables follow, I think the generic remarks that we made, what we basically saw in our MIS segment overall is that, yes, the lockdowns were pretty hard right, especially in the latter part of last year, and the first part of this year. And I think only recently started to reopen. And you can kind of see that in the remarks made by, let's say, large medical OEMs. That only towards the latter part of the first quarter, they're starting to see some recovery. And so basically, towards us, we're trailing that by a good 90 to 120 days, right. So that's basically what you're seeing. But right now we do see them, ordering starting to order more. And therefore, that feeds into our confidence for the second half, the first half will still be a little bit soft.

[Richard Eastman:]

Okay. Yes. Fair enough. Just maybe my last follow up question here, around China and regional growth there. I mean, you did speak to 40% plus growth in China? Presumably, that's led by the advanced industrial product lines. Is there any change on the medical side? Or is that quite small in China?

[Robert Buckley:]

Medical is still fairly small for us in China, to be very honest, so are the OEMs that we deal with are mostly Western OEMs on the medical side. Now, having said that, we do see Chinese OEMs starting to ramp and rest assured, we are, of course engaged there. But that business for us is still fairly, fairly small. The majority of our China growth, right now is photonics and precision motion driven and it's about 50

[Operator:]

And our next question comes from Brian Drab from William Blair.

[Brian Drab:]

In terms of capacity utilization, can you talk a little bit about where you're at? I mean, you're achieving record level results and forecasting to go above and beyond that, and just wondering, are you able to find the people you need as you head in that direction?

[Robert Buckley:]

Yes, so first and foremost, I mean, capacity utilization typically is a term that's used when you have like a big fabs and that kind of stuff. So basically for us it's materials and labor and the main gating item as we as we highlighted is actually the material, also it is basically our supply chains not able to follow what is unprecedented rebound right that is across the board. And then, of course, having both at the same time in demand and the supply shock right because the you see some shocks in the supply side too. So that's really more gating. I won’t say anything else. Of course we are very active in making sure that yeah, we're getting the labor in that we need. First remember, growth system helps there as really leaning out our production floor so we get more out per area. But I would say the main message here is that the supply chain is gating our growth more than anything else.

[Brian Drab:]

Okay, thanks. And then, the precision motion gross Margin was a little lower than I was modeling photonics was a little above. I know you made some comments around this. I think some of it has to do with supply chain. Can you just talk about why that might be? Maybe it's just because I modeled incorrectly? And then, how do you see the gross margin for the segment's progressing as you move through the year?

[Robert Buckley:]

Yes, I mean, you didn't really get the model correctly, I do think it came in a little lower than we're expecting some of that was the expediting fees, and some inefficiencies in our labor production as a consequences of material shortages. We did overall able to mitigate for that elsewhere. So it's not always we're able to mitigate it per se in a specific business segment. But we are able to work it out across the overall organization. So I do think some of the things with , we have gotten some of the material and now to deal with our second quarter. And we should be able to hold a better gross margin profile as we get into the second quarter. But that short-term in the first quarter was really tied to that.

[Brian Drab:]

This level in photonics, I think was a little over 49% gross margin in the quarter. Is that sustainable? That was a little better than I was expecting.

[Robert Buckley:]

Yes, I hope so. It's a short answer. I mean, some of that is -- it's tied to the NGS process, where we really kind of leaned out the production processes and got better efficiency around that. I think that team has done a better job in mitigating their supply chain disruptions. And so they've been able to get the right sort of materials in advance. It took some of the warnings in the fourth quarter to heart. And I also think that from a level loading perspective, they've been able to plan well ahead of time. There is some expansion going on there right now, we are expanding our optics facility in the U.K. I'm not expecting any major disruptions from that. And in fact, that should really kind of enable us to continue to expand that gross margin. But the short answer is that should hold for now.

[Operator:]

And I'm showing no additional questions. We'll end today's question-and-answer session. I'd like to turn the floor back over to Mr. Matthijs Glastra for any closing remarks.

[Matthijs Glastra:]

Thank you, operator. So to summarize Novanta's performance in the first quarter of 2021 was excellent. We had record sales and bookings and beat around expectations for profit and cash flows, our innovation programs are healthy and progressing. And we launched five new products in the quarter and are on track for our ambitious plans to launch 25 new products throughout the year, which is double last year's. We saw tremendous growth in design wins and feel confident that we're succeeding at growing our presence in our target application areas. We're excited to see the rebound happening in the global economy and particularly in the advanced industrial sector with a return to growth also in the horizon in the medical sector. Novanta is well positioned in the sectors with diversified exposure to long-term secular macro trends and robotics and automation, precision medicine, minimally invasive surgery and industry 4.0. In closing, I would like to thank our customers, our employees and our shareholders for their ongoing support. I'm particularly grateful for the dedication and strong contribution of our teams of committed Novanta employees who have rapidly pivoted and are again showing up and serving our customers during one of the strongest recoveries ever experienced. 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 2021 earnings call. Thank you very much. This call is now adjourned.

[Operator:]

Ladies and gentlemen, with that will conclude today's conference. We thank you for attending. You may now disconnect your lines.