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novanta\'s (novt) ceo matthijs glastra on q2 2017 results - earnings call transcript
Second Quarter 2017 Earnings call at 10: 00 a. m. on August 3, 2017
Chief executive Barkley-
Chief Financial Officer Jagoda-
My name is Nicole and I will be your conference operator today.
At this time, I would like to welcome everyone to the Novanta inincorporated 2017 second quarter earnings call.
All lines are muted to prevent any background noise.
There will be a question after the speaker speaks --and-answer session. [
It is my pleasure to hand over the meeting to Sir now.
Robert Buckley, chief financial officer
Sir, please proceed.
Thank you, Nicole.
Good morning, welcome to the 2017 earnings call for the second quarter of Novanta.
I\'m Robert Buckley, Novanta\'s chief financial officer, and in today\'s conference call I\'m the chief executive of Matthijs Glastra.
If you do not receive a copy of the press release we posted earlier 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 start, we need to remind everyone of the safe harbor ahead --
The statement outlined in our earnings press release earlier this morning, as well as the statement outlined in the SEC document.
We may make some comments today in our prepared statements and in our responses to questions that may include forwarding
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 shouldn\'t rely on any striker 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 indicators are inconsistent with the GAAP indicators 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, ceo of Novanta.
Thank you, Robert.
Good Morning, everyone. welcome.
Novanta\'s revenue and profits exceeded our expectations in the second quarter.
Our company\'s revenue is $0. 119 billion, 22% years. over-
Annual report revenue growth 7. 4% year-over-
Organic income growth.
In addition, we have expanded the annual profit of EBITDA-over-
The number of years increased from 380 basis points to 21. 5% of sales.
The adjusted EBITDA is $25.
6 million, up nearly 50% from last year.
Our adjusted earnings per share are $0.
41, up 52% from $0.
The second quarter of 2016.
We continue to see this quarter
Based on the growth momentum of the entire company, all three operating departments have shown a doubledigit year-over-
Annual report revenue growth.
Very good booking performance with a bookto-bill of 1.
This quarter was 13.
We believe that the strength of our team, we provide a strong business model that is proprietary and mission --
The key functions of the diversified terminal market and our continuous growth in the medical market provide us with good services.
You will hear more details about the quarterly and annual outlook from Robert, but the strong first-half performance gives us confidence to improve the outlook for the full year of 2017.
We continue to make good progress on strategic priorities. Year-to-
Date, our design won over 40% years-over-
Years in dollars and the number of designs won, while new product revenue grew by more than 30%-over-year.
Our revenue yearto-
As we continue to expand our direct sales force in the region, the date from China has increased by more than 20% over last year.
We believe these indicators support us.
Long-term organic growth guidance from 5% to 7%.
As we announced earlier, we closed the WOM acquisition in July 3.
This acquisition has greatly advanced our long-term
Long-term strategy to expand our influence in the medical market through the market
Leading business in minimally invasive surgery.
After the acquisition of WOM, our income in the medical market will exceed 50%.
Together with the existing Novanta business, we have now created a revenue platform of $0. 12 billion in the attractive field of minimally invasive surgery, with a deep relationship in endoscopic and robotic surgery applications, and
Sell to each other\'s customers.
Nearly 40% of WOM\'s revenue is made up of a proprietary one-time business bundled with pumps and insufflators.
This one-time business is largely driven by the growth rate of patient processes, creating a stable recurring revenue stream.
The WOM integration work is progressing smoothly. the integration team is fully equipped and has a good start.
As we begin to work more closely with the WOM team, we are impressed by its strong demand expertise, solid channels for innovation and long term collaboration
The long-term growth potential of this business.
We also see the opportunity to strengthen our mutual customer relationship during minimally invasive surgery.
This is also a good look at the two acquisitions we closed in January 20, the number of ThingMagic and laser performance.
Laser quantum revenue doubled year on yearover-
This year, by increasing the content
Growth in the DNA sequencing market.
Although ThingMagic helped Novanta speed up, the overall winning rate of RFID design has increased year by year. to-
The date doubled in a year. over-
This year, with our strong demand in the healthcare market, we have a more complete RFID portfolio.
Now let me talk about what we see in the core market.
For us, the medical market continues to be strong and we are in high school.
The growth application of this market.
The field of life sciences and minimally invasive surgery is doing well.
DNA sequencing and robotic surgery applications are our strong growth engine, thanks to increased clinical acceptance and increased Novanta content.
We are constantly seeing improvements in the environment in the advanced industrial market and are strengthened through solid business execution by our team.
In the second quarter, satellite communications, advanced laser material processing and warehouse automation provided us with powerful applications.
Now let me talk about our operations.
Our precision sports sector continues to be our strong growth engine at 17% years. over-
A year of revenue growth and a bookto-bill of 1.
As we discussed earlier, the Celera movement business in the precision motion operation section is taking advantage of the structural growth dynamics, this is the market for satellite communications, autonomous vehicles and minimally invasive surgery driven by favorable macro trends in automation, precise and dynamic motion control in robotics.
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.
Salad action display doubledigit year-over-
Annual growth in new product revenue and design wins.
The Applimotion motor product line business, which was acquired in 2015, also achieved a sixth consecutive quarter of growth.
The product line is a leader in fields such as satellite communications, providing smooth and accurate motion of the satellite antenna on the aircraft, thus improving the real-time performance of the aircraft.
Another exciting application with long-term growth momentum is warehouse automation, driven by the rapid growth of online retail.
We are pleased with the strong performance of Celera Motion and see the huge growth potential of the business.
So we are accelerating our investment in Celera to drive continued organic growth over the next few years.
Now we\'re moving to our photon field, which saw revenue growth in the 25% quarter --over-One-year-old booksto-bill of 1. 19.
Growth is driven primarily by laser quantum acquisitions and commercial execution in industrial environmental improvement.
Once again, our Cambridge tech team has provided record bookings across multiple apps.
Cambridge technology is the largest business of our Photon Group and the world leader in laser beam steering in medical and advanced industrial applications.
We recently launched the Lightning II Plus scanning head system, expanding our performance lead in this business, and we are sharing applications such as laser additive manufacturing and conversion through drilling.
Material shortages have hampered revenue growth in Cambridge this quarter, which we believe will be largely addressed in the third quarter.
With a record backlog of positions in the third quarter, we expect revenue from the business to grow strongly in the second half of the year.
Our Synrad line of business, driven by the recovery of the industrial market and the launch of new products, booked a record revenue quarter
Power Pulse CO2 laser.
As we discussed on our previous call, Synrad is the leader in a low-margin niche market
A power CO2 laser focusing on fine processing of organic materials.
As production technology shifts from mechanical to automated laser production processes, these applications are growing structurally.
The star of photon operations this quarter was laser quantum.
As mentioned, the business has doubled this yearover-
Driven by rapid growth in clinical acceptance and higher Novanta content
The market for DNA sequencing is growing.
Laser Quantum has an excellent and motivated team and we are proud that they continue to develop strong innovative pipelines on such steep ramps.
Following this year in new-
We believe that growth in this business is likely to return to market growth of 10% to 15% per year.
In the photon field, the design won $ 25% in the second quarter --over-
The first half of 2017 was mainly driven by Cambridge technology.
Applications with strong performance are laser additive manufacturing, marking and coding, conversion, drilling and micro-machining.
Turning to our visual section helps reduce medical errors, improve workflows and patient outcomes in applications such as minimally invasive surgery, patient monitoring, life sciences and clinical laboratory equipment.
In the second quarter, our vision Department achieved 20%. over-
Driven by our ThingMagic, our JADAK and NDS businesses have achieved acquisitions and improved organic growth.
In the first quarter, the bookto-
Bill in our visual section is 1. 07.
We are pleased to see that the gross profit margin in this part is close to the average level of our company, and the operating income has been greatly improved.
Behind the acquisition of ThingMagic and SkyeTek, we continue to see the huge design of RFID win momentum.
In this quarter, 50% of the overall design wins in our JADAK business came from RFID-
Based on a wide variety of medical applications.
As mentioned earlier, ThingMagic enhances our ability to detect technology
Growth, the RFID market for medical application identification and tracking is worth $0. 2 billion.
As more and more people need to identify tracking, the demand for RFID in healthcare is increasingand-
Connect devices, drugs, and patients for the best workflow and patient safety.
As a leader in healthcare RFID technology, with the strong opportunity funnel of 2017, it has a very positive impact on the wider JADAK business.
In this quarter, we experienced the second consecutive quarter. over-
Driven by new products, our endoscopic endoscope shows annual organic revenue growth for the business line.
We expect the business to be a net contributor to our revenue and profit growth in 2017.
At the end of my section, we were very pleased with the organic revenue growth and profitability we achieved in the second quarter and the performance of our recent acquisition.
Novanta\'s leadership in key medical and industrial markets, coupled with our rigorous M & A approach, has laid a solid foundation for sustainable, profitable growth.
In the context of very strong first-half performance and strong 2017 prospects, we are increasing our investment in the growth sector with a focus on innovation, sales and operations.
Our acquisition performance is very good, although our M & A channels continue to be active, but our short-term
The long-term focus is on integrating the three acquisitions we have completed so far this year.
So I\'m going to transfer the call to Robert to provide more details on our financial performance. Robert?
Thank you, Matthijs. good morning, everyone.
In the second quarter of 2017, we achieved $0. 119 billion in revenue, up 22% from reported revenue.
The net effect of the acquisition led to an increase of $15 in revenue. 4 million or 15
8%, while the negative foreign exchange rate of US $1 has a negative impact on our income. 3 million or 1.
The second quarter of 2017 was 3%.
As a result, organic growth increased by 7.
Compared with 2016, it increased by 4%.
The gross profit of 2017 GAAP in the second quarter was $53. 5 million or 44. 9% of sales.
By contrast, $41. 5 million or 42.
Gross profit margin for the second quarter of 2016 was 5%.
Gross profit for the second quarter of 2017 included the impact of $1. 7 million or 1.
Amortization of purchased development technologies and 4% of sales adjusted for fair value of inventory related to acquisition business. On a non-
Adjusted gross profit for the second quarter was $2017. 2 million or 46.
3% of sales, about $42. 5 million or 43
The second quarter of 2016 was 5%.
Annual gross profit margin growth-over-
This year is driven by higher incomes and a more favorable combination. Margin products.
R & D costs $9 million or $7.
6% of sales, $8 million or $8.
2% of sales last year.
SG & A costs $23.
9 million or 20% of sales.
By contrast, this is $20.
Sales in the second quarter of 2016 were 2 million or nearly 21%.
While SG & A expenses as a percentage of sales decreased, SG & A dollars increased mainly due to acquisitions and increased variable compensation costs associated with better financial performance.
GAAP operating income is $15.
Compared to $7, the quarter was 6 million.
6 million in the second quarter of 2016, not
GAAP operating income is $22. 2 million or 18
Sales accounted for 7% per cent compared to $14. 3 million or 14
7% of sales last year.
Adjusted EBITDA increased by nearly 50% year on yearover-year at $25. 6 million or 21.
Sales for the quarter were 5%, compared to $17. 3 million or 17
7% of sales last year.
Interest expenditure for the quarter was $1.
$4 million to $1.
The previous year was 2 million.
The weighted average interest rate of our senior credit institution is 3.
8% this quarter.
On the tax side, our GAAP rate is 31.
This quarter was 9%.
This is different from Canada\'s statutory tax rate of 29%, mainly due to a mix of revenue in jurisdictions with different tax rates. On a non-
According to the accepted accounting principle, our tax rate is 29. 5%.
Looking forward to the full year of 2017, we continue to expect 30% non-GAAP tax rate.
The diluted earnings per share we obtained from continuing operations, calculated on GAAP, are $0.
This quarter was $16, compared to $0.
The second quarter of 2016.
It is important to note and point out that in 2017 we increased the book amount of redeemable non-redeemable items
The controlling stake in laser quantum is $3.
7 million to reflect the estimated redemption value as at the end of the quarter.
The adjustment is recognized as net $0 in retained earnings.
Earnings per share are reduced only on the basis of accepted accounting principles.
Adjusted diluted earnings per share are $0.
The second quarter was $41, compared to $0.
The second quarter of 2016.
Growth in revenue year-over-
This year was driven by the strength of all three business units and acquisitions.
We ended 2017 with 35 points.
The weighted average diluted common stock of 5 million is not issued, which is compared with 34.
As of the end of 2016, 9 million shares had been issued Weighted average diluted shares.
Our operating cash flow is $16.
This quarter was $8 million, compared to $15.
The second quarter of 2016 was 5 million, and profit growth had a positive impact on operating cash flow.
This is partially offset by higher net working capital due to increased corporate and inventory levels acquired, especially in our photon field.
Capital expenditure is about $1.
The first quarter was $4 million, down from $2.
The second quarter of 2016 was 9 million.
We signed the pharmaceutical acquisition world on June and completed the transaction on July 3.
This acquisition is funded by reducing our revolving credit financing.
We completed the second quarter with a total debt of $111.
$5 million and $89.
1 million of cash
As of the end of the second quarter, the net debt we defined in the earnings press release was $25. 4 million.
As we move into the business momentum for the third quarter and the end of the WOM acquisition, we are improving our financial outlook by 2017.
Throughout 2017, we expect revenue from GAAP to be approximately $0. 497 billion to $0. 502 billion.
This represents an annual growth rate of 30%. over-
Organic growth is expected to be 6% to 8% in the second half of the year.
We expect adjusted diluted earnings per share to be within $1. 40 to $1.
The adjusted EBITDA was approximately $96 million to $98 million.
It is worth mentioning that our adjusted EPS and EBITDA guidelines do not bear significant foreign exchange gains and losses.
In the third quarter of 2017, we expect GAAP revenue to be around $0. 13 billion to $0. 135 billion, with adjusted diluted earnings per share expected to be within $0. 34 to $0.
The adjusted EBITDA was approximately $25 million to $27 million.
Our third-quarter and second-half forecasts contain the financial results of WOM and the consolidated costs of incorporating the business as a public company line of business into our business.
In addition, because we have confidence in the strength of the enterprise, whether it is short-term or long-term
In the long run, we are increasing our investment in the business to better prepare for sustained growth and further accelerate organic growth in the coming years.
You will see this in higher R & D, sales and marketing spending in the second half of this year.
We expect the adjusted gross profit margin to be in the range of 46%, similar to 2017;
R & D costs are around 9.
5% of sales represent an increase in investment in the business over the next few years to accelerate organic growth.
Novanta\'s net income is expected to decrease by about $700,000 in minority equity and interest spending by about $2 in the quarter. Between $4 million and $2. 5 million. The non-
The GAAP tax rate is expected to be around 30%.
We also amended our credit agreement in July.
The amendment increased the revolving credit loan commitment under the credit agreement by $100 million to $0. 325 billion and reset the accordion function to $0. 125 billion for future potential acquisitions.
In addition, the amendment increased our current balance of regular loans by $25 million from $65.
$6 million to $90. 6 million.
We believe that this credit agreement provides us with enough capital to execute our near
While maintaining discipline around capital deployment in the future, we regularly acquire the pipeline.
As we look forward to the third quarter, after the completion of the WOM acquisition, we continue to expect a total leverage of 2.
5 times, our net debt leverage should be closer to 1.
Quarter 5 times.
We are satisfied with the quarterly results and the company\'s progress.
We continue to see significant opportunities for both organic and non-organic investments.
Thanks to the talent and advanced level of our business, we are confident in our ability to achieve our strategic goals and 2020 strategic vision.
This concludes our prepared remarks.
Let\'s start asking questions now. Question-and-
Your first question is from Lee Jagoda of CJS Securities.
Good morning, good morning.
Good morning, Li.
Robert Buckley Lee
If I look at the R & D spending, you will say that the latter half will be higher.
We looked at it for a while and said it should be around 9% and you can never spend it, which I think is a good thing.
If I look at what is the goal of additional spending, can you talk about some of the end markets you are pursuing or some of the new products you are focusing on?
Good morning, Lee.
Thank you for your question.
Yes, I commented in my prepared comments that one of the areas where we are accelerating our investment is Celera Motion business or Precision Motion business, as I pointed out, it has been performing in an excellent way.
This is driven by automation trends, the medical market or the need for precision motion control for surgical robots and advanced industrial automation --Related markets.
So we are excited about the prospects of the business.
Given the acquisitions we have made, we are also investing more in RFID.
Moreover, the performance of laser quantum is very good. for the future development, we will continue to invest in this business.
These are several areas.
But as we commented, we were very pleased with the momentum of the company as a whole.
So what we\'re looking at is the R & D investment, engineering investment, and sales investment that we\'re seeing in the growing areas. Lee JagodaOkay.
Then with regard to laser quantum, can you talk about the percentage of the current business related to DNA sequencing and then about the potential opportunities you see outside the laser quantum market?
We won\'t separate the percentages, but it\'s a big business for them, as you know.
More than 50%.
We are actively seeking investment, one of the areas of investment outside of the DNA sequencing sector to accelerate growth there.
Please note that the business outside of DNA sequencing and laser quantum has been developing very well, but DNA sequencing in the market and business has grown faster, right?
So it\'s like a luxury issue.
But yes, the reason we bought this company is because we are optimistic-
Regarding their potential in many applications, yes, over time you will see us in clinical analysis and other markets and you will see some progress we have made there. Lee JagodaOkay.
On laser quantum, based on your results for the first six months, you\'re running at a much closer pace to $37 million in annual revenue compared to the estimated $25 million when merging entities.
Is there any confusion associated with this that will prevent the running speed from continuing in the next half?
Robert Buckley. yes.
We did disclose in Q its price of about $18 in the first six months.
6 million, this will definitely allow them to exceed our original forecast for the business.
So, yes, there is an expectation that they will defeat this.
But one thing I\'m going to say is that in the first half of this year, they saw a significant increase --
One of their customers has launched a new product platform.
So this will lead to some confusion.
The typical process is to build more products for this ramp
Then smooth from then on.
Should Lee JagodaSo continue to maintain similar interest rates in the third quarter and then decline in the fourth quarter?
Or what should we think?
Robert Barkley did not want the business to stop organically soon.
From the point of view of growth, it will definitely slow down from 100%, right?
So it will not correct itself. But I think -
It won\'t be that strong-it won\'t be as strong in the fourth quarter as it was in the first half, to be fair. Lee JagodaOkay.
I think more in dollars in order.
Robert Buckley. yes.
Next, this is a shift in the NDS business.
Can you update us on the profitability?
In the next 12 to 18 months, where can you see profitability compared to the company\'s average?
We are more or less breakeven in this industry and we have shown a year-over-
So we are very satisfied with this.
Therefore, it is a contributor to the company\'s net profit and income.
I think it\'s more important that they continue to win the design through 4 k display and wireless solutions, the differentiated proprietary technology they have and the technology we \'ve invested in over the last two or three years.
So we see the results of these technologies.
For example, the adoption of the medical market is slower than consumer electronics, but it is stable and we are satisfied with what we see.
Therefore, we believe that this business is no longer a drag on the company. Lee JagodaOkay.
Give me the last one.
You mentioned that Cambridge technology was hindered by some delays in the product this quarter.
Are you energetic?
Has this been resolved? Should we expect in the third quarter?
So I\'m talking about our shortage of materials.
In particular, a product I mentioned, Lightning II Plus.
The acceptance and adoption of this product and market demand is stronger than we expected.
So our supply chain is a bit down.
But we have solved most of the shortage now.
We entered the third quarter with a record backlog of data, so we thought the business would go back to the medium term. to high single-
Figure growth in the second half.
I gave it all.
Thank you very much.
No further audio issues.
I would like to return the meeting to Mr.
The closing words of Matthijs Glastra.
Thank you, operator.
All in all, now is a great time to join Novanta.
Our focus on accelerating earnings growth is evident in the strong financial performance and our outlook for the quarter.
The diversity and strength of our business provide us with good service, and I am proud of the execution of our team.
We are implementing our strategic direction of 2020, doubling the company\'s revenue to $0. 75 billion with a 20% EBITDA profit margin, organic growth of 5% to 7%, leading the market in our business, at the same time, more than 50% of the income from the medical market.
Our growth strategy focuses on multiple drivers of growth.
We are leading the growth market.
We are expanding the service market through innovation and strict M & A, with a focus on expanding our healthcare business.
We are achieving deeper market penetration worldwide through a stronger and larger sales force, all of which are maintaining our commitment through strict execution and continuous improvement.
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 third quarter earnings call in a few months.
Thank you very much.
Now the call is delayed.
This is the end of today\'s conference call.
We appreciate your participation and ask you to disconnect the line.