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novanta\'s (novt) ceo matthijs glastra on q1 2017 results - earnings call transcript
First Quarter 2017 Results Earnings call 10: 00 a. m. May 8, 2017
Berlin Stock Exchange-
Good morning, Thames Capital Management.
My name is Vergil. I will be your conference operator today.
At this time, I would like to welcome everyone to the Novanta 2017 Q1 earnings call. [
Operation instructions]Thank you.
Timothy spenella, Novanta\'s treasurer, you can start your meeting.
Timothy SpinellaThank you a lot.
Good afternoon, welcome to the 2017 earnings conference call for the first quarter of Novanta.
I\'m Novanta from the Moses motor family.
Today\'s call is Matthijs Glastra, our chief executive, and Robert Barkley, chief financial officer.
Robert lost his voice for the time being, but there are questions to ask.
If you do not receive a copy of the press release we have released today, you can get it from the Investor Relations section of our website. novanta. com.
Please note that this phone is live webcast and will be archived on our website.
Before we begin, we need to remind everyone of the safe harbor ahead.
The statement we outlined in our earnings press release earlier this morning, as well as the statement in the SEC document.
We may make some comments today in our prepared statements and in our answers to questions that may include moving forward
Look at the report.
These include inherent assumptions of known and unknown risks and other factors that may lead to significant differences in our future results from our current expectations. Any forward-
Today\'s statement represents only our views today.
We do not assume any obligation to update forward.
Even if our estimates change, we will look forward to the future.
So you should not rely on any progress today
The statement represents our point of view from any date after today.
In this call, we will mention some non-
GAAP Financial indicators.
For this non-
The GAAP financial measures that are most directly comparable to the GAAP measures can be used as an attachment to our revenue press release.
What we use
During this call, GAAP financial measures are inconsistent with the GAAP measures in the earnings press release, and we will provide timely reconciliation in the Investor Relations section of the website.
I am now pleased to introduce Matthijs Glastra, Novanta\'s chief executive.
Thank you, Tim.
Good Morning, everyone. welcome.
In 2017, we had a very strong start with record earnings and EBITDA performance leading our earnings and profit guidance in the first quarter.
Our company has achieved 21% reporting and more than 10% organic revenue growth with strong profitability.
Our revenue was $0. 109 billion, operating income was $10 million, and adjusted EBITDA was $20 million, up 48% year on year. over-year.
We expanded EBITDA\'s profits this year. over-
The number of years increased from 340 basis points to 18. 4% of sales.
Our earnings per share are $0.
Our adjusted earnings per share are $0.
31, up 72% from $0.
First quarter of 2016.
We believe that the strength of our team, our strong business model in providing proprietary mission-critical functionality in a diverse end market, and our growing engagement with the medical market provide us with good service
In the quarter, we saw a broad momentum of growth across the company, with all three operating units showing double growth. digit year-over-
Annual report revenue growth.
Very good booking performance with a bookto-bill of 1.
This quarter was 11.
Later in this call, you\'ll hear more financial details about the second quarter outlook, but strong first quarter results give us a high level of confidence in the outlook for the full year of 2017.
As mentioned in the previous earnings call, we completed two exciting acquisitions in early 2017.
We acquired ultrahigh magic, a supplier of ultra-high frequency RFID models and readers, and we increased our stake in laser quantum from 41% to about 76%.
As you may remember, laser quantum is the supplier of optical engines.
The state waits for ten consecutive-to-second lasers.
These acquisitions further advance our strategy in the medical market.
Including these acquisitions, our revenue in the medical market has now increased from 45% a few years ago to about 10%.
Both acquisitions performed very well and the integration was smooth.
Now let me talk about what we see in the core market.
The medical market continues to be strong, the life sciences and minimally invasive surgery are performing well, and the new design has won the opportunity to continue to grow.
In the life science field of laser quantum capture, we are now in
Digital growth in DNA sequencing applications.
Finally, robotic surgery is another powerful dual application we see.
Driven by an increase in clinical acceptance of higher Novanta content, digital growth.
We have seen improvements in the environment in the advanced industrial market, and new products and commercial execution have helped us grow there.
In the first quarter, we achieved great applications in marking and coding, satellite communications, advanced laser material processing and warehouse automation.
In the first quarter, our design won over 50% years-over-
Annual and new product revenue growth of more than 40% year on yearover-
Our investment, innovation and business resources are being rewarded.
As we expand our direct sales presence in the region, our quarterly revenue from China grew by more than 25% over last year.
Now let me talk about our operations.
Our precision sports sector continues to grow at an annual rate of 21%-over-
A year of revenue growth and a bookto-bill of 0.
This quarter was 98.
In particular, our Celera Motion business is taking advantage of the favourable macro trend-driven structural growth dynamics of precise and dynamic Motion control in the market for automation, robotics, satellite communications and minimally invasive surgery.
Also, as our share today is relatively small, these attractive markets are scattered and growing in a highly single way, we see solid potential for expansiondigit rates.
With multiple design wins bookings, demand for our new Veratus products has grown steadily.
As mentioned earlier, Veratus is a new compact optical encoder that extends our performance lead in precision motion to the new advanced industrial market.
We expect that the revenue contribution of the new product will be more meaningful in the second half of 2017 and 2018 and the growth in leasing the product to production.
Turning to our photon sector, revenue growth accelerated to 26%-over-year and book-to-bill was 1. 13.
Growth has been driven by improved industrial environment, global expansion and laser quantum acquisitions.
Our Cambridge technical team provides record bookings and high single digit revenue growth, maintaining a broad momentum with new and existing customers in a wide range of applications.
Cambridge technology is the largest business of our Photon Group and the world leader in laser beam steering in medical and advanced industrial applications.
Key applications are eye, microscope and looking for material processing applications such as laser additive manufacturing, conversion,-
Drilling, marking and coding and micro-machining.
As traditional production processes move closer to laser technology, all these markets are growing in structure
Process driven by higher accuracy, throughput, and automation requirements.
We have expanded the performance leadership of Cambridge technology through the recently launched lightning 2 plus scanning system, and we are sharing-
Drilling, laser additive manufacturing and conversion.
In our Synrad line of business, organic growth in the first quarter was 9% due to the recovery of the industrial market and the launch of new products for low-power pulco lasers.
We like the new one [indiscernible]
The goal of the product is to expand our leading position in the coding market. digit growth.
Synrad leads the way in a small, profitable niche
The power CO2 laser focuses on fine processing of organic materials (such as plastic, textile and copper materials) using electronic equipment clothing, food and beverage and packaging industries.
With the transformation of mechanical production technology to laser, these profits are growing in structure.
Based on the production process, unlike high policy or about 1 KW of applications, our Synrad business focuses on metal cutting and welding and is not affected by the migration to fiber lasers.
Our photon field continues to make a huge contribution to our overall growth.
In the first quarter, the design victory in this area increased by more than 50% year on year. over-
Our investment and business teams are working on results.
Applications with strong performance are laser additive manufacturing, marking and coding, through
Drilling and micro-machining.
Turning to our visual section helps reduce medical errors, improve workflows and patient outcomes, and applications such as minimally invasive surgery, patient monitoring, life sciences and clinical laboratory equipment.
In the first quarter, our vision was partially achieved for 14% years. over-
Driven by our ThingMagic and Reach acquisitions, revenue growth this year has exceeded our expectations for revenue and profits.
In the first quarter, the bookto-
Bill is 1 in our vision section. 17.
Behind the acquisition of ThingMagic and SkyeTek, we see the huge design of RFID winning momentum.
In the first quarter, 50% of the design victory in organic business was the foundation of RFID in various medical applications.
As discussed in the previous phone call, ThingMagic has enhanced our detection technology capabilities at the top level
The RFID market for medical application identification and tracking grew by $0. 2 billion.
As more and more people need to identify, track and connect devices, drugs, and patients to achieve the best workflow and patient safety, RFID needs in healthcare are increasing.
As a technical leader in our healthcare RFID, with a strong 2017 opportunity funnel, it has a very positive impact on the broader JADAK business.
We were encouraged this quarter. over-
The new product-driven endoscopic endoscope shows annual and continuous revenue growth for the business line.
In 2016, we launched a total of 10 new products, which led to a continuous increase in revenue of about 3%.
We feel that we are turning this industry around and there is no doubt more work to be done. We are very pleased with these results and expect the industry to be a net contributor to our revenue for profit growth in 2017.
At the end of this initial segment, we were very pleased with the organic revenue growth and profitability we achieved in the first quarter.
We will continue to invest in innovation and business capabilities to accelerate our growth and plan to increase our R & D spending to 9% of sales in 2017.
In addition, we are very excited about the two acquisitions completed in January 2017, which greatly strengthens our presence in the attractive medical market.
With a strong start, we are very confident in our prospects of 2017 and have guided the growth of double-digit reported revenue and earnings per share with the growth of 2016.
Our acquisition performed well and our M & A channel continued to be active, providing a good opportunity for 2017.
Novanta\'s leadership in key medical and industrial markets, coupled with our rigorous M & A approach, provides a solid foundation for sustainable and profitable growth.
As Tim mentioned at the top of the phone, Robert lost his voice for the time being, so let me look into the financial performance in more detail.
In the first quarter of 2017, we achieved $0. 109 billion in revenue, which is reported to have increased by 21%.
The net effect of our acquisition and divestiture has led to a $10 increase in revenue. 6 million or 11
5%, and the exchange rate of foreign exchange has a negative impact on our income of US $1. 2 million or 1.
The first quarter of 2017 was 3%.
Therefore, organic growth increased by 10.
Compared with 2016, it increased by 5%.
Gross profit of 2017 GAAP in the first quarter was $46 million or 42. 3% of sales.
By comparison, $37 million and $40.
Profit margin for the first quarter of 2016 was 8%.
Gross profit for the first quarter of 2017 included the impact of $2. 7 million or 2.
Development techniques for procurement and adjustment of fair value of inventory amortized 5% of sales. On a non-
Adjusted gross profit in the first quarter of 2017, based on generally accepted accounting principles, was nearly $49 million or 44.
8% of sales, about $39 million or 43.
The first quarter of 2016 was 7%.
Annual gross profit margin growth-over-
The sales mix of products with increased revenue and higher profit margins has driven growth this year.
R & D costs $9 million or $8.
5% of sales, $8 million or $8.
9% of sales last year.
SG & A costs 23% or 21% of sales, compared to 21 million or 23.
Sales in the first quarter of 2016 were 5%.
The total SG & A expenses increase, mainly due to acquisitions this year and the previous year and investments in sales and marketing resources.
Despite the increase in dollar spending, SG & A\'s percentage of sales fell by 240 basis points as we made better use of spending.
GAAP operating income is $10.
Compared to $2, the quarter was 2 million.
The first quarter of 2016 was 6 million, not
GAAP operating income is $17 million or $15.
2% of sales, $10 million or $11.
3% of sales last year.
As I mentioned earlier, the Adjusted EBITDA grew by nearly 50%over-
$20 million or 18.
Sales accounted for 4% of the quarter compared to $13.
5 million or 15% of sales in the previous year.
Interest expenditure for the quarter was $1.
$3 million to $1.
The previous year was 2 million.
The weighted average interest rate of our senior credit institution is 3. 7%.
We also recorded $26 this quarter.
4 million, non-taxable income after the acquisition of laser quantum.
This gain represents the excess fair value of our previously held laser quantum equity relative to its book value.
On the tax side, our GAAP rate is 3.
This quarter was 1%.
This was delayed by Canada\'s statutory tax rate of 29%, mainly because of the mix of income earned in jurisdictions with different tax rates and the impact associated with the establishment of control over laser quantum. On a non-
Our tax rate is 28 according to the accepted accounting principle. 5%. Our non-
The GAAP tax rate does not include the impact associated with the establishment of control over laser quantum.
In 2017, we continue to expect 30%
GAAP tax rate and more than 35 million outstanding shares.
The GAAP diluted earnings per share we continue to operate are $0.
The quarter was $98, compared to $0.
First quarter of 2016, 05.
Our adjusted earnings per share are $0.
Rose from $0 to $31 in the first quarter.
In the previous year.
Adjusted annual earnings per share growth-over-
Strong operating results from all three operations and acquisitions have driven growth this year.
We ended the quarter with 35 points.
The average diluted shares of 1 million plus rights are 34.
9 million shares of weighted average diluted shares issued as of the first quarter of 2016.
Our cash flow is $12.
This quarter was 8 million, compared with 8.
The first quarter of 2016 was 3 million.
Operating cash flow is positively affected by profit growth.
This was partially offset by lower network capital performance and production growth of key customers in the life sciences segment caused by the acquired enterprise.
Even stronger this year. over-
We believe our return on inventory is 3.
6 times still too high for our business model.
Our focus in 2017 will be to improve inventory returns by improving the production of our supply chain discipline and material planning processes.
Capital expenditure is about $1.
The first quarter was $8 million, down from $2.
The first quarter of 2016 was 3 million.
We continue to use Oracle in our recent ThingMagic acquisition and Celera Motion business.
Both are going very smoothly and the business is running at full capacity.
As we mentioned earlier, we hope to implement Oracle and some other businesses in 2017.
We paid $50 this quarter.
ThingMagic and laser quantum buy 2 million cash.
However, net cash from laser quantum is $15.
3 million, our net purchase price is $34. 9 million.
This is reported by the cash flow statement under investment activities.
We completed 2017 with a total debt of $21.
$4 million and $80 million in cash.
As of the end of the first quarter, the net debt we defined in the earnings press release was $41. 4 million.
This brings our combined total leverage to 1.
Form EBITDA 5 times a quarter.
Our strong first quarter results allowed us to be high
End or may exceed the full version we released earlier
But we believe the best time to re-examine our integrity-
After we release our second-quarter results, we will look forward to the future.
At the moment, we are continuing to publish the practice of quarterly guidelines.
In the second quarter of 2017, we expect GAAP revenue to be between $0. 11 billion and $0. 112 billion.
This represents growth and interim reports of 12% to 15%
Compared with 2016, the organic growth of single digits was achieved.
I will note that our organic growth indicators do not include the organic growth of acquisitions, both of which have achieved double-digit organic growth in form.
We expect the adjusted gross profit margin to increase by 150 to 200 basis points compared with 2017, and R & D expenses will account for about 9% of sales, minority Equity spending is expected to be between $500,000 and $1 million this quarter.
In the second quarter, we expect adjusted earnings per share to be within $0. 30 and $0.
33. assume that there is no significant profit or loss in the foreign exchange rate.
Finally, the Adjusted EBITDA is expected to be between $21 million and $22 million.
As we mentioned earlier, we continue to be very active from an acquisition perspective and have seen significant opportunities during 2017.
We continue to be focused and disciplined in driving the continued transformation of the Novanta business, improving financial returns and achieving the 2020 vision.
Overall, we are very pleased with the first quarter\'s performance and the company\'s progress.
When we see the whole
This year, we have seen opportunities and continued progress in strategic and financial objectives.
This concludes our prepared remarks.
Let\'s start asking questions now. Operator? Question-and-
Your first question is from Lee Jagoda of CJS Securities.
Good morning, guys.
So start with the organic growth of the quarter and the organic growth implied in your guidance.
Can you talk about the contribution of new products and new product pipelines to organic growth?
Matthijs GlastraYes, in terms of the percentage of sales, we did not disclose the details of Li, but this is a very important impact.
So we commented on the impact of the growth percentage in the quarter.
So yes, we will continue to comment on that.
Lee Jagoda and you commented earlier that you expected the performance of the new product to benefit more than in the first half.
You know that your guidance on organic growth in the second quarter is very strong, and it\'s clear that the first quarter benefits from simple comp, but in a way, the new product will be more beneficial in the next half, that is to say, organic growth may also accelerate in the second half of the year?
Matthijs glastrwell I did very well, mainly in our field of precision sports, we launched the Veratus product and we saw it well booked and we were talking
So we saw the more important contribution of the product in the precision sports section of the second half, no matter what the sentence is about.
Lee jagdago understood.
So I think, given the trends in DNA sequencing and the growth you expect this year, just turn to the laser quantum business, why is the former owner of the laser quantum now deciding to sell and have one there-
Whether there is a priority refusal in the laser quantum protocol and then as a follow-up
On top of that, in any future transaction you have the right to refuse to purchase the rest in the first place.
Matthijs GlastraSo, first of all about the question of time, of course, we should tell the founder about this question, but we know them very well, this is a good time for them, because they are expanding their business in a very important way, and as you can see in our financial results, they feel that with the strength of novanta in fact, we can help them on the ramp and add more credibility to the ramp, as well as further develop their business in areas other than DNA sequencing.
So it\'s good for them themselves, it\'s good for us, and our timing is really good.
But they still have a 25% stake, so we are eager to see it fully --
They do a good job in business.
Lee jagodand, then on the first refusal right, do you have the right when someone else is ready to sell?
Matthijs GlastraYes. Lee JagodaOkay.
Then my last one, regarding the profitability of India, can you tell us the current income of the business and the current gross profit margin? I know this may not be profitable yet just so that we can understand the drag it may have on gross margin in first quarter of 2016 and move on in the coming quarters.
Matthijs GlastraYes, I mean there were more tracks in the past than today.
I mean, we\'re not going to split deep finance into two parts, but a few years ago it was a much larger business, when it was a lot more drag on our financial results than it is today, what you\'re seeing now has two implications, one is that the business is much smaller and back to growth.
So if there is less material, it is now good for our business.
Okay, so this is-
The key, however, is that of course we are very happy because we have finally seen a change in the business based on the rather heavy investment we have made.
So we\'re happy with that, and that\'s why we commented.
Assuming that today\'s gross profit margin is positive, over time, is this a business era in which the average profit margin of the company should be achieved, much lower than the average profit margin of the company?
We think that if the average EBITDA-EBITDA or gross margin of the company-I mean gross margin should be similar.
I think the profit margin of EBITDA may be lower than 20%.
Still, this is a big improvement in terms of losses.
Last year and the year before.
Okay, Lee jagdaley.
Great. thank you.
The next question comes from Berlin of Thames Capital Management.
Jared BerlinHi, thank you for your time
There seems to be a good start to the recent acquisition, and from the balance sheet, obviously there is extra capacity, and I\'m just wondering how you balance, and ensure that these acquisitions continue to go smoothly, fully integrated compared to incremental acquisitions in the coming quarters and years.
Matthijs GlastraYes, so the first is about the integration of the acquisition, both of which are very suitable for our existing business, and ThingMagic is fully integrated into our j in a week.
They were relocated to the Bedford factory and the team worked very well.
So it\'s a fairly small business in a small team with high quality talent, so retention is the key, and we\'re proud to say it\'s a good start, but our joint business is growing very quickly, so people are excited to work together.
I \'d say classic Tucker.
Integration is fairly simple in acquisitions.
Laser Quantum continues to be run by their founders.
As mentioned just now on the phone, they still hold about 25% or 24% of the company, and they report to the photon field that the transition is very smooth, having the opportunity to leverage Novanta\'s sales channels for their products, I am pleased to say that the collaboration is going very well, especially with our Cambridge technology business having a large number of very interesting quarterly laser quantum business customers.
Therefore, we are very happy with the integration of these two businesses, which is almost a non-event.
People focus on business and do a good job.
In terms of the upcoming acquisition, we say that we continue to be very active, as you said.
Having said that, as always, we are disciplined, so we are very picky, and the right companies are also leaders in their respective markets, where they show consistent financial performance, have a sustainable competitive advantage, typical assets such as operational structure and strong management teamterm growth.
So, as a very strict set of standards that we hear, we will also hear, however, according to which we do see a very active channel, you expect us to stay active for the rest of the year.
Thank you so much to Jared BerlinGreat.
The operator has no problem at this time.
I transferred the phone to the host.
Thank you, operator.
All in all, now is a great time to join Novanta.
We will have a very strong start this year.
Our focus on accelerating earnings growth is reflected in our strong financial performance.
The diversity and strength of our business also play a role and I am proud of the execution of our team.
We also believe that our strategic direction is to increase the exposure of the medical market, which lays a good foundation for us to achieve sustainable and profitable growth.
As mentioned earlier, we are now entering the growth stage of a transformation journey focused on multiple growth drivers.
We are leading the growth market, we are expanding the market for our services through innovation and strict M & A, with a focus on expanding our healthcare business, or achieve deeper market penetration globally through stronger and larger sales teams, all while maintaining our commitment to disciplined execution and continuous improvement of the business system.
Finally, I would like to thank our customers, employees and shareholders for their support.
Thank you for your attention to the company and for your participation in today\'s conference call.
I look forward to joining our second quarter earnings call in a few months.
Thank you very much.
The call is now postponed.
This is the end of today\'s conference call.
You can disconnect now.