Novanta Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 7 speakers on the call.

Operator

My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated 20 20 3 First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. 2. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Speaker 1

Thank you very much. Good morning, And welcome to Novanta's Q1 2023 earnings conference call. I'm Ray Nash, Corporate Finance Leader of 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 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.

Speaker 1

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.

Speaker 1

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 we use non GAAP financial measures during this call that are not I'm now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthijs Glastra.

Speaker 2

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta started 2023 with a strong Q1. In the quarter, we delivered $219,000,000 in revenue, Our adjusted EBITDA was $47,000,000 and adjusted diluted earnings per share was $0.74 These results are better than our expectations and guidance and reflect excellent operating performance by our teams in an evolving macroeconomic environment. We We feel the strong performance in the Q1 puts us on track to achieve our full year outlook and it will help drive a more balanced performance in the first half of the year.

Speaker 2

The Novanta business model with diversified exposure to high growth medical and advanced industrial markets have proven resilient under multiple geopolitical and advanced industrial applications with long term secular tailwinds, such as robotics and automation, healthcare productivity and precision medicine. We feel that the strength of our portfolio and business model combined with our winning growth strategy, focused on where we play and how we win, Now let's turn to what we're seeing in our markets and our customer activity. We continue to see strong ongoing demand from our customers in many application areas. We made great progress, reducing our past due backlog to customers by more than 25% sequentially, while still maintaining a near record backlog of $604,000,000 nearly flat with the prior quarter. Our book to bill in the Q1 was 0.96, in line with our expectations and 2 of our 3 segments had book to bill greater than 1 times in the quarter.

Speaker 2

As we discussed in the last earnings call, we continue to reduce our lead times for our products back to historical averages and customer expectations. And yet we continue to see strong demands from customers represented by our strong backlogs giving us further confidence in our outlook. 2nd Novanta sales. During the quarter, we sold very strong orders and shipments to many of our medical OEM customers with noteworthy strength in minimally invasive surgery equipment and consumables, in vitro diagnostics and patient monitoring equipment, DNA sequencing and ophthalmology. These categories also strong double digit growth and sales year over year.

Speaker 2

These applications are seeing structural growth based on underlying secular growth drivers such as patient surgical procedure growth rates and advancements in biopharma technologies, including advancements in next generation DNA sequencing technologies. As we discussed in the Q4 earnings call, we continue to expect to see these growth drivers for the remainder of 2023 and in 2024. Turning to the Advanced Industrial Markets. Our sales in the quarter, excluding microelectronics applications, were up 1% year over year and made up approximately 38% of total Novanta sales. The slower growth was in line with our expectations and is the result of a tighter industrial capital spending in macro environment, which you can see in macro indicators like the PMI indices.

Speaker 2

Yes, yes. Yes, we continue to see resilient sales performance in many of our industrial end markets, including multiple automation and robotics applications as well as precision manufacturing applications driven by continued underlying demand for factory automation, battery and electric vehicle production increased overall adoption of automation and enabling technologies offset by more GDP sensitive applications such as engraving and laser cutting. Overall, our industrial exposure is steadily geared towards the secular markets mentioned above. The dynamics in just our microelectronics markets, which represented less than 9% of sales, largely remained unchanged from our last call. We continue to see double digit declines year over year from the cyclical downturn in this market.

Speaker 2

Consistent with the last quarter, The largest decline manifested in our technology offerings for the PCBA vehicle drilling equipment market. The overall drop in the macro electronics market remains a 200 to 300 basis point headwind on total Novanta sales growth for the full year. In the Q1, sales to North America grew 26% year over year and sales in Europe declined by 1%, which reflects macroeconomic slowdown this region is working through and its connections with the China market. Sales in China, which represents about 8% of total sales declined 34% year over year, which was predominantly caused by the decline in microelectronics revenue. Right now, our China exposure is heavily weighted towards these microelectronics applications.

Speaker 2

But with our ongoing design win activity and focus on high growth end markets, we 2 years. We expect to better diversify and grow our presence in attractive end markets in the China marketplace in the coming years. Now Now let me touch on some of Novanta's strategic growth metrics. For the Q1, our vitality index was about mid teens percentages of sales, Which is down versus the prior year, but in line with our expectations. As a reminder, we track new products in the vitality index for the 1st 4 years after their production launch.

Speaker 2

Starting in 2023, several top products such as our 1st generation smoke evacuation products Reached this 4 year cutoff milestone. And so we're no longer tracking them in the index, although they continue to contribute significantly to our overall sales growth. We expect our vitality index to stay at roughly this mid teens level for most of 2023, representing a bit of a transition year on this metric. Well, we do expect this index to rebound in 2024 as we launch and ramp up multiple new product platforms. The investments we've made in our Taunton Optics facility, Our new Manchester optical subsystem manufacturing facility and our new Czech Republic medical consumables manufacturing facility are all being done to support this future growth.

Speaker 2

As such, we also continue to invest heavily in R and D in order to solidify the on time launch of these platforms. While we've seen some delays in new product launches as a consequence of shifting resources to deal with the microelectronic part shortages over the last 2 years, We feel confident these milestones will be achieved. Moving on to design wins. For the Q1, we experienced a expected year over year decline, which is mainly 2. We had a tough year over year comparison from a large design wins achieved in the Q1 of 2022, Mainly in our minimally invasive sugar business associated with our 2nd generation smoke evacuation insufflators.

Speaker 2

In this business, we won large new product platforms in 2021 2022 with both existing and new customers, Next, I'd like to give you a brief update on Novanta's acquisition integration activities. Our integration of Miles per hour medical devices continues to progress well. The site is ramping up its capabilities to produce Novanta's own proprietary medical consumable products. We successfully implemented a new ERP at the site in the quarter and began ramping production activity support to support product qualifications with our customers. And finally, we're changing the names of our 3 reportable segments, photonics, vision and precision motion.

Speaker 2

We're changing the names of these reportable segments to better reflect our strategic focus and focus on applications. These names which more closely fits with the segment's focus on laboratory analytical equipment and technologies, including advancements in next generation DNA sequencing technologies and on precision manufacturing technologies, including sophisticated laser based optical subsystems for 3 d printing, robotic and alarm technologies and laboratory automation subsystems. And finally, the Vision segment will change its name to Medical solutions, which better fits the segment's focus on medical components, subsystems and systems, including smoke evacuation insufflators, endoscopic pumps, for the rigors of an FDA registered medical environment. As a reminder, this segment does not represent all of Novanta's medical end market exposure. In summary, we had a very solid first quarter.

Speaker 2

We had excellent sales growth, driven by strong demand in medical end markets. We also delivered very healthy operating performance and profit growth, which is based on a great progress in deploying the Novanta growth system and continued success We're staying the course on executing our strategy and capital deployment model. With that, I will turn the call over to Robert to provide more details on our operations and financial performance.

Speaker 3

Robert? Thank you, Matthijs, and good morning, everyone. The first quarter non GAAP adjusted gross profit was $101,000,000 or 46 percent gross margin compared to $94,000,000 or 46 percent gross margin in the Q1 of 2022. For the quarter, adjusted gross margins were up sequentially over 100 basis points and flat year over year. This outcome was better than our expectations and represents strong execution by our teams to achieve this result.

Speaker 3

This achievement puts us on a solid track to achieving a full year goal 10% of sales. The first quarter SG and A expenses were $41,000,000 or roughly 19% of sales. Overall operating expenses as a percent of sales were up sequentially in the quarter as a result of the impact of variable compensation programs and the seasonal payroll taxes as well as the increased R and D investments. Adjusted EBITDA was approximately $47,000,000 in the Q1 of 2020 3 or 21% adjusted EBITDA margin versus $44,000,000 in the prior year. On the tax front, our non GAAP tax rate in the Q1 of 2023 12%.

Speaker 3

This differed from the statutory rate due to jurisdictional mix of income and the seasonal impact of equity compensation windfall benefits. Our non GAAP adjusted earnings per share was $0.74 in the quarter compared to $0.73 in the Q1 of 2022. While adjusted EBITDA grew in the high single digit range, EPS was muted due solely to higher interest expense. We expect cash flows to continue to improve during the rest of the year as we gradually bring down our inventory to more historical levels and continue to drive strong profitability. We ended the quarter with gross debt of $428,000,000 and our gross leverage ratio was 2.3 times.

Speaker 3

Our net debt was $345,000,000 putting the company in a great position to fund further acquisitions. Now turn to an updated performance of our operating segments. As Matthijs mentioned, we did change the names of our reporting segments in the quarter. We renamed Photonics segment Precision Medicine and Manufacturing. Our Vision segment is now renamed to Medical Solutions and our Precision Motion segment is now renamed to Robotics and Automation.

Speaker 3

I'll start by sharing details about Precision Medicine and Manufacturing segment, formerly known as Photonics. For the Q1 of 2023, revenue grew 11% year over year. This segment continues to very strong customer demand in the traditional medical applications and the planned uptick in next generation DNA sequencing. The book to bill in this segment was 1.06 in the quarter, again driven by strong demand in our medical markets and resilient demand for multiple industrial applications focused on productivity enhancing equipment in the manufacturing floor. In the quarter, bookings in this segment were up 28% and roughly flat year over year.

Speaker 3

The strength Factory new product revenue stayed strong at greater than 20% of sales in the Q1. Our sales teams continue to win excellent new business and attractive high growth medical industrial applications, winning new content, winning new customers and winning in new applications. Design wins in this segment were down year over year, but this was really driven by timing, particularly around the new wins in our intelligent light engine subsystem business Vision Medicine and Manufacturing segment adjusted gross margin was 50% in the quarter, which was up nearly 400 basis points year over year. This is a great outcome and reflects the efforts and successes this team is having in deploying the Novanta Growth System deep into the organization in 2 and overcoming some of the operational supply chain challenges they experienced in the prior year. Turning to our Medical Solutions segment, formerly known as Vision.

Speaker 3

This segment saw reported revenue growth of 25% year over year, which was stronger than expectations. Growth in this segment continues to be driven by strength in elective surgical procedures and continued success in our 1st generation smoke evacuation insufflator technology, as well as our JADAC business, where the business continues to catch up from past due backlog after supply chain challenges of 2022. And 12% year over year, further indicating the building demand we see in this end market. The vitality index in this segment Reduced versus prior year. As Matthijs mentioned, this is largely driven by 1st generation smoke evacuation insulator products reaching its 4 year milestone.

Speaker 3

And so we are no longer tracking it as part of our official vitality index. As a result, this segment had a vitality index The mid teens in the Q1, which is in line with our expectations. We expect this metric to stay at this level for 2023, But increase thereafter as we launch multiple new second generation smoke evacuation insulators, which will start to have a significant impact on our sales in the coming years. Design win activity in this segment also declined in the Q1 year over year solely from very difficult comparisons from the record breaking design win progress in 2022 from our 2nd generation smoke evacuation products. Finally, turning to Robotics and Automation segment, formerly known as Precision Motion.

Speaker 3

This segment experienced a revenue decline of 9 2% year over year in the quarter. This was in line with our expectations in prior guidance. This decline continues to be driven by steep year over year decline in microelectronics applications, particular in the PCB AVE hole drilling applications, which declined nearly 70%. Excluding this decline, the remainder of the segment grew single digits in the quarter. This decline in PCBA drilling is causing a sales growth headwind 3rd quarter.

Speaker 3

For overall Novanta of approximately 200 basis points to 300 basis points in the full year. The overall book to bill ratio on this segment was approximately 0.8, Again driven by the Microelectronics decline and exposure. Microelectronics experienced a negligible level of bookings in the quarter. New product revenue was roughly 10% of sales for this segment in the quarter. This ratio is lower than prior year because it now includes product sales from our ATI business lines, which had minimum new products in its revenue and therefore is having a dampening effect on the overall segment ratio.

Speaker 3

However, as we mentioned in the Q4, we are working hard on ramping the new product development in this business And we expect to launch multiple new products in this business in the second half of this year. Adjusted gross margins for the segment segment as the year progresses, both as we manage our cost structure and as other productivity gains gain further traction. Now turning to guidance. As Matthijs mentioned, we expect to see order behavior from our customers returning to historical patterns as our product lead times drop. Our prior lead times have been as high as 12 months or more and we are seeing them come down to a quarter 2 of that level in many cases, which is closer to our historical lead times.

Speaker 3

We do not see this having any impact on our sales growth outlook 2 for the quarter or for the full year. And the strength of our backlog is a reflection of our innovations in the applications in which we participate with strong demand signals still represented in the larger application areas. From an end market perspective, We see similar dynamics in the 2nd quarter as we did in the Q1. We expect demand in our medical end markets to remain that we saw in the Q1, in line with the overall macroeconomic and industrial spending environment. We continue to expect Our continued disciplined focus on secular growth applications and new product introductions to allow our business to experience growth declines in the PCBA via whole drilling applications year over year and also some declines in semiconductor wafer fab equipment.

Speaker 3

As mentioned before, this end application will continue to be a revenue headwind for Novanta in the Q2 in a similar magnitude as we experienced in the Q1. So starting with revenue guidance, for the Q2 of 2023, we stand here today with GAAP revenue in the range of $222,000,000 to 225,000,000 year, which represents revenue growth in the mid single digit territory on a year over year basis. If you exclude the impact of the microelectronics headwinds, our revenue growth Medical and Industrial Applications, including DNA Sequencing, Ophthalmology and Micro Machining. Our Robotics and Automation segment is expected to be flat sequentially and down approximately 10% year over year. The year over year decline is driven by the downturn in the microelectronics market.

Speaker 3

Excluding the microelectronics decline, this segment will be growing from demand in industrial robots, medical robots, electric vehicles and battery production applications. Finally, our Medical Solutions segment is expected to demonstrate revenue growth in the 18% to 22% range in the Q2 and is expected to be up sequentially as well. Medical end markets continue to be very strong driven by return of elective Moving on to overall Novanta's adjusted gross margin, we expect gross margin in the 2nd quarter to be approximately 46% to 46.5%, which is up sequentially and will continue to demonstrate good expansion year over year. The Precision Medicine and Manufacturing segment gross margin is expected to be flat sequentially, whereas the Robotics and Automation segment is expected to be up sequentially. The Medical Solutions segment is expected to see gross margins slightly down sequentially due to a higher mix of medical consumable sales.

Speaker 3

We believe our team's efforts to use the Novanta Growth system will help us sustain and expand gross margins as we progress deeper into the year. Turning to R and D and SG and A expenses, they are expected to be approximately $65,000,000 to $66,000,000 particularly investments in our Medical Solutions segment tied to the aforementioned development of our 2nd generation smoke evacuation insufflator products and some further investments in our commercial engine. Depreciation expense, which was about $4,000,000 in the Q1 will be about the same in the Q2. Stock compensation expense, which was over $6,000,000 in the Q1 will be roughly similar In the Q2 for adjusted EBITDA for the Q2 of 2023, we expect a range of $47,000,000 to 49,000,000 interest expense, which was over $6,000,000 in the Q1 is expected to be about $7,000,000 in the Q2 of 2023, Driven by the continued rise in interest rates. We continue to focus on paying down the debt to mitigate the impact of rising rates.

Speaker 3

We expect our non GAAP tax rate to be around 18% for the Q2. The sequential rise in the tax rate from 12% to 18% is driven by our expectations around jurisdictional mix of income as well as timing caused by our Q1 equity compensation windfall benefits. It should be noted that the tax rates across a variety of geographical regions have increased and hence we're working to minimize the impact of Novanta. Clearly, rates will be a little higher than 2022. Diluted weighted average shares outstanding will be approximately 36,000,000 shares.

Speaker 3

For adjusted diluted earnings per share, we expect a range of $0.70 to $0.74 in the second quarter. And we expect cash flows to improve sequentially due in part to the seasonal effects mentioned previously and from our continued efforts to bring down our inventory levels. We are also continuing to invest in manufacturing facility expansion projects such as our new Taunton Optics Facility, our new Manchester Optical Subsystem Manufacturing Facility and our New Czech Republic Medical Consumables Manufacturing Facility. These investments are all critical to support our growth outlook for the next several years. As always, this guidance does not assume any significant changes foreign exchange rates.

Speaker 3

In summary, Novanta's performance in the Q1 of 2023 was excellent. We beat our own expectations and the guidance for sales growth, for margins and for profit performance. We saw tremendous growth in for medical end markets, which more than offset a known headwind in microelectronics. This dynamic is yet another testament of the balance and resiliency of this business portfolio. 1, and we continue to see great success in attracting and retaining top talent.

Speaker 3

Despite a more uncertain macroeconomic environment, The higher interest rate environment, we believe we're on track to achieving our outlook for the full year of 2023 and we see our growth remaining strong well past this year 2 on the back of exciting new product launches starting later this year. We remain very grateful to the outstanding performance of our employees and their tireless efforts to help us be successful in this dynamic environment. We look forward to continue to deliver on our commitments to our employees, our customers and our shareholders. This concludes the prepared remarks. We'll now open the call for questions.

Speaker 2

Good morning, Lee.

Speaker 4

So just starting with the microelectronics business, can you talk about How much of the current run rate today is tied to EUV lithography and how we should think about the growth there? And then, sort of secondarily, just Comment on the Westwind business. And is this a similar situation to the situation we were in probably 8, 10 years ago where the Westwind business went down close to 0 just because capacity in the space wasn't getting utilized and as capacity gets utilized again, we should expect that business to come back at some point?

Speaker 2

Yes. I mean, on the last question, you're right. I mean, I think there was a tremendous capacity build as a result of The macro electronics boom and so we'll have to work through that capital utilization, 2, let's say, trough for a little while. And that's why we don't expect that business to come back this year and the microelectronics to stay down for On your first question, we basically in our last call, what we outlined was more of a forward look view that in, let's say, 2 years from now, we expect actually the makeup of microelectronics to fundamentally change more geared towards EUV rather than the exposure to the Westwind business.

Speaker 3

Yes. So I think we said in the Q4 earnings call that we probably declined to somewhere around 7% of revenue. So overall microelectronics exposure Somewhere close to 8% to 7% of total revenue. And the majority of that would be in the EUV, DBUV application area. So as it gets to the end of the year, then we're actually in a territory where we have a secular growing piece of microelectronics.

Speaker 4

Okay. That's helpful. And then, just on the check facility, I think it sounds like you're making some good Progress on the qualification of the new products. But just looking at that facility, I think when you bought it, there were some product And whether that's been a margin headwind or tailwind as a result of the actions you've taken.

Speaker 3

Yes, it's a great question. We'll 4. Probably, yes, the effort is to slowly wind that business down. It is a margin headwind. The margins are significantly Significant qualification costs and then cash outlays associated with bringing our own production up there.

Speaker 3

And We're attempting to time that so that as we ramp that business down, it's covering the cost of our qualification efforts. That will largely be behind us by the end of the first half. And in the second half, the qualification steps remaining for our production facility rely on process and getting through the final stages there with an expected ramp of production start in the 4th quarter with real volume on a material level starting to come out next year. Now we've implemented SAP in the site. We've actually started testing some production runs.

Speaker 3

We've done significant training. We've had equipment moved into the facility. And so overall, we feel we are well on track to ramping up production and medical And the gross margins associated with the old MPH business will largely be gone by the end of the first half.

Operator

The next question comes from Brian Drab of William Blair. Please go ahead. 2.

Speaker 5

Hi, thanks for taking my questions. First on the new product launches, the way that you've been communicating some of the Opportunities related to new product launches were $20,250,000,000 in revenue opportunity. And I'm wondering if some of the launches that you're talking about coming later this year and in 2024 are Opportunities you've had visibility to for some time now? Are there some new ones? And how do those fit into the context of this 2025 opportunity for $50,000,000 annual revenue that you've been talking about.

Speaker 2

Yes. I mean these comments are Consistent with that level of $50,000,000 in 2025. So and of course we are ramping also other new product launches, But those are consistent with our what we've been communicating on our overall growth algorithm, right? So we do feel the second half really starts to mark a yes, a momentum building up to the levels that you mentioned in 2025. And that's why we made those comments.

Speaker 3

So one thing, Brian, I'd mentioned is, when you think about Why we guided a 2025 number instead of 2024 number is that with a lot of these products launching at the end of this year, It means 2024 volumes are going to be harder to predict with a high degree of accuracy because there are different cycles of OEMs coming online at different times throughout the year and different qualifications that they need to engage in with the hospital environment and the medical practitioners. And so as a consequence, we can get very accurate with 2025. In 2024, it would be a larger range and look funny. So we're being a little bit more cautious on 2024, but all those launches are consistent with that. And I would say that The continued investment in the manufacturing facilities in Manchester and Taunton and in the NPH business are signs of that confidence that we wouldn't be outlaying As much of an investment in those facilities, if we didn't believe the growth was on track and materializing in the pace in which we thought it would materialize.

Speaker 5

Got it. Okay. So this is not a situation though where, I guess at the extreme end of the spectrum would be like a bunch of new product Platforms launching at the end of 2024, contributing revenue of $50,000,000 in 2025. It's more of a It's ramping somewhat in 2024, hitting that run rate in 2025. Correct.

Speaker 2

That's right. That's correct. That's right.

Speaker 4

Okay.

Speaker 3

So it takes the risk out of the numbers a little bit, right, if you think about it from that perspective. Yes. Okay.

Speaker 5

And roughly, I mean, can you talk a little bit in more detail about how many opportunities you're talking about? I mean, is there one that accounts for More of that 50 than others and any granularity give us in terms of number of opportunities?

Speaker 2

Yes, I think we've been consistent in our earnings remarks on this, but let me kind of Rephrase it and or summarize it. So in the minimally invasive surgery area, We've won basically many second generation insufflator businesses, both 4 endoscopy as well as for robotic surgery markets. And in addition, we've won endoscopic pump So with all with multiple OEMs. So that's where the majority of that $50,000,000 is at. And then in addition, We see based on the R and D investments that we've made in other areas, such as our beam steering, laser beam steering business, For example, our precision formerly known precision motion business robotic and automation segment, You see a ramp in new products happening as well in both robotics and automation as well as precision manufacturing.

Speaker 2

So electric vehicle, For example, micromachining, EUV, laser additive manufacturing, those are that we're primarily targeting with subsystems. And so you see that percentage of the business increasing as well with the launching of new products in those areas. So multiple applications we've talked about and where we're gearing our MPIs towards.

Speaker 5

Okay. Thanks. And then just lastly for now, how are you handling pricing lately in this environment? And Can you talk at all about how much you expect price to contribute to revenue growth maybe And or margin expansion in 2023.

Speaker 3

Yes, I won't get into specifics. We've been very consistent with our customers on the narrative that The increase in price is helping to offset the inflationary pressures that we're seeing and it's the sharing arrangement that we have, right? So I think we've been that's the message that we've signaled to our customers. That's the message we've been on externally. And I think that's reflective of the The actual efforts that we've engaged in.

Speaker 3

Now it's fair to say that there's a bifurcation happening in 2023, where The material costs or capital goods are actually seeing some ability to take costs down. Microelectronics may be a bit of an exception to that in certain areas. But yet then services and third party services and utilities and other types of ancillary services that we pay to support the manufacturing efforts 3. Are still in an inflationary environment. And so we expect inflation in 2023 to be a headwind.

Speaker 3

We expect price To be a lever to offset that, at least help offset that. And we feel like ultimately at the end of the day, Our goal is to expand gross margins to 100 basis points. A lot of that will come through helping us launching some new products Driving Novanta Growth System into our facilities and we feel good about that. We delivered a solid gross margin in the Q1. We'll deliver a solid gross margin in the Q2 and we'll continue that march throughout the course of the year to drive that 100 basis points.

Speaker 5

Got it. Okay. Thank you very much.

Operator

The next question comes from Rob Mason of Baird. Please go ahead.

Speaker 6

Yes, good morning. You had mentioned that you made some good progress reducing your past dues on the backlog. I'm just curious What percent of your backlog now is in that past due category?

Speaker 2

Yes. I don't think we've disclosed that, but The fact that we've reduced past due backlog by 25% sequentially, we feel is very meaningful. And then maybe more importantly, the lead times to our customers have come down. I think Robert put this in his prepared remarks from in some cases over a year To now less than 12 weeks or sometimes even less than 6 weeks. So you see a dramatic reduction in lead times as a result of Really strong efforts from our operations teams.

Speaker 2

And so yes, we feel good about We're starting to catch up substantially. The lead times are coming down and to kind of pre pandemic historical averages. Well, by the way, our backlog as a percentage of look forward revenue for the next, let's say, 12 months look forward is still at that record territory of mid to high 60s percentages versus historical levels of, let's say, mid-30s percentages, right? So you still have that at the historically very high backlog, But past due coming down rapidly and lead times coming down rapidly.

Speaker 6

Would Mattias, would you expect that backlog percentage eventually on next 12 months revenue to work towards that Historical level or is there anything structurally different in the way that your customers are going to order Or that you would view your backlog?

Speaker 2

It's a little hard to say, but we expect Yes. I mean, this is the mid-60s is unusually high, right? So we expect that to come down. I I mean, our customers when we have lead times of 6 weeks, they really don't need to order for like a full year, right. So that is and that was what historically used to be the case.

Speaker 2

So we used to be a book to bill business of about 1 on average and we expect that to come back to those levels on average over time. But in order before that happens, We first have to work that backlog down and ship to our customers. So I do expect it to come down to closer to historical levels, but Maybe a little bit more elevated than in the past. It's hard to say though.

Speaker 3

Yes. I think if you look back in the Q4, I gave some Rough guidance on that. We'll never be back to where the where we were, where there's only a quarter's worth of backlog, But we won't be at these levels either. So I think it will bleed down to past dues will largely be behind us. Hopefully, if everything 2.

Speaker 3

This plan by the end of the second quarter, then you're dealing with marginal levels at best of past due. And therefore, Really what you're looking at is that there's a significant amount of future demand that is That's still being placed on us and people getting ready for production ramps of new products in 2024 and beyond. And so we will have an elevated level Because of that, there's a lot of new products coming online. And so it will be above the historical levels, but below maybe a little bit of what caused the past 2 issue.

Speaker 6

I see. And you made some commentary around the some of your 2nd generation products coming out. Certainly, We would assume, I think you secured some new customers, new OEMs there. But as you think about the growth there, is there also new Is that weighted more towards new customers

Speaker 3

or added content at a high level? That's a great question. That's a great question. It's a Combination. When we won we believe that our 2nd generation smoke evacuation technology become a standard of care, which means that it will be standard in all minimum evasive surgical procedures on a go forward basis.

Speaker 3

It takes 2. Time to get real penetration in the global market for that. And so why we think we make the commentary around that, why we believe that is largely Because we've won new customers. We've won new application areas. And we've obviously replaced older technologies that we've had in place.

Speaker 3

We've done a combination of things. The 1st generation smoke evacuation insulator was relatively limited in launch. It went ahead with a single large customer. And I think on a go forward basis, you'll see the breadth of that of our new offering being sold to a multitude Customers including some that we've never served before.

Speaker 6

Yes. And just last question around The microelectronics business, if I understand you correctly. It sounds like that business probably trends out or you expect it to trend out kind of flattish Revenue wise in dollars for the remainder of the year. Is that correct?

Speaker 3

Do you

Speaker 6

think it's stabilized?

Speaker 3

Yes, that's absolutely the math. So by if you effectively just keep it flat, the percentages go down because you You start to face the easier comparisons once you get to the back half of the year, but the revenue itself is relatively flat in our forecast For the full year right now. Now that doesn't mean like there's some underlying dynamics there. You got EUV, DPUV growing and then you got other areas that's still Seeing some weakness in back end semiconductor type of equipment. And so there's a dynamic there, but as you exit 2023, 2.

Speaker 3

You're now predominantly in a growth category. And we expect that then to grow in 2024 as we penetrate with additional content and additional penetration into EUV applications. Got it. Got it. Thank you.

Speaker 2

Thanks,

Operator

I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.

Speaker 2

Thank you, operator. So to recap, Novanta had a very impressive Q1 2023. We saw good sales growth despite the headwinds times and our past due backlog, and we continue to see strong tailwinds in our medical businesses. We're progressing our innovation pipeline, We're excited for the large product launches happening later this year and next year. We feel we're on track with our full year 2023 outlook.

Speaker 2

Novanta remains well positioned in the medical and advanced industrial end markets with diversified exposure to long term secular market trends in robotics and innovation, precision medicine, minimally invasive surgery and Industry 4.0. In 2023 beyond, We will continue to focus on new product development, design wins and high growth applications, driving cash flows and institutionalizing the Novanta growth system. In closing, as always, I would like to thank our customers and our employees and our shareholders for their ongoing support. I continue to be especially grateful for the dedicated efforts of all our Novanta teammates. We work diligently every day to tackle new opportunities and manage through new challenges.

Speaker 2

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 Q2 2023 earnings call.

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Earnings Conference Call
Novanta Q1 2023
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