Q1 2020 Earnings Call
At this time I will like to welcome everyone to the no that's will incorporate a 2021st quarter earnings call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session to ask a question you May Press Star then one all your Touchtone phone to withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to re Nash corporate Finance leader. Please go ahead Sir.
Yeah.
Thank you very much good morning, and welcome to know batches first quarter 2020 earnings Conference call I'm right now finance Peter Novanta with me on todays call as our Chief Executive Officer with highest bostra at our Chief Financial Officer, Robert Buckley.
If you have not received a copy of our earnings press release issued today you may obtain it from the Investor Relations section of our website at Www Dot Novanta Dot com.
Please note this call is being webcast live and will be archived on our website shortly after the call.
Before we began 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 that our SEC filings, we may make some comments today, both in our prepared remarks and that our responses to questions may include forward looking 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 expectation.
Any forward looking statements made today represent our views only as of this time.
Disclaim any obligation to update forward looking statements in the future use of our estimates change. So you should not rely on any of these forward looking statements as representing our views as of anytime after this call.
During this call will be referring to certain non-GAAP financial measures a reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings.
That's really.
To the extent that we use non-GAAP financial measures. During this call, but are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on Investor Relations section of our website. After this call.
I know please introduce the chief Executive officer of no gossip with highest mostra.
Thank you Ray good morning, everybody and thanks for joining our call I Hope all of you and your families are healthy and safe.
Before we start or normal quarterly results review I would like to first talk about the topic on everybody's mind, which is to covert 19 pandemic.
Want to take a moment to think our employees our customers and our suppliers all of whom are making extra ordinary efforts to maintain supply over a mission critical products through the people who need than most.
I've been extremely impressed and I could not be more proud of how my colleagues around the world have step up and pulled together in a phase of adversity.
Obviously to rule that's changed dramatically since our last earnings call no bad theres not immune to the impact of the pandemic that we are well positioned to wetter to covert 19 crisis.
Our balance sheet is strong our innovation engine is strong.
And our portfolio is diversified across 45 different applications with exposure to long term secular growth trends in robotics, and automation health care productivity and precision medicine.
Yeah, Hi, uncertainty climate like this we feel it's best to stay focused on what we can control and what we have invested in over the years.
Our employees, our culture and delivering mission critical technologies to our customers.
Our for guiding principles and managing through that pandemic, followed this focus one keeping our employees their families and our communities safe to ensure a business continuity for customers three ensure a bright future and emerge out of this crisis stronger and for live our values.
Let me dive a bit deeper in each one of these first our primary goal at Novanta continues to be the safety and all being over employees their families and communities on which we operate.
Our China facility was the first of all have operations impacted by the Corona virus outbreak and we were able to swiftly implements the learnings Oh for Chinese team to our other sites worldwide.
Globally. The majority of our non production employees are working from home and we have enacted rigorous safety measures in all of our sites, including temperature checks.
Social distancing protocols, providing master dose employees, who must be physically present.
Spreading work over more shifts and frequently disinfecting our work spaces.
To date of the roughly 2200 employees at Novanta, we've had two employees, who contracted the virus and who fortunately have fully recovered since.
Our absenteeism is low at around 1%.
And we're going to remain very vigilant and mindful of employee safety when societies around the world decide to gradually reopened.
We are also committed to providing nonmonetary supports to our communities. For example, we donated 10000 face mask that were sourced from our factory in China to a local U.S. hospital.
Our second guiding principles to maintain business continuity. So we can support our customers with the covert 19 outbreak our vision of purpose to deliver innovations that matter is more relevant than ever.
We take great Pride at our mission critical technologies are embedded into diagnostic an antibody test equipment detecting covert 19 into I see you and patient monitoring equipment DNA sequencing equipment to sequence different mutations and strains of the virus laser coating equipment for critically packaged food supply or.
Production of Pp eat and cloud infrastructure equipment.
As a result, all of our production sites have been qualified as essential manufacturing operations. Once the pandemic hit we immediately established global and local response teams and I'm pleased to say that our operations and supply chains have experienced minimal disruptions thus far.
In other critical aspect of our business continuity plans is to ensure proper liquidity and cash flow. We have decisively implemented additional actions of processes to improve cash flow and Robert will provide further details here.
Our third guiding principle is to ensure a bright future and emerge out of this crisis stronger we have invested aggressively over the years to build great capability and a great culture with incredibly talented teams and we are committed to keep these capabilities in place if anything we believed that our long term secular growth drivers are even more.
I live in post pandemic.
If the best innovation line up that we've ever seen to catch the secular growth ways and we're staying the course on priority innovation programs.
Finally, our fourth principle is to leave our core values.
Now more than ever and Novanta be re belief that a healthy company culture is the ultimate competitive advantages in the phase of opportunity and adversity.
This means trusting and charter being comfortable with constructive conflict for the good if the company and holding each other accountable to deliver our version of a healthy performance culture is called an event, though a which institutionalizes how we work together and cohesive teams, how would behave and interact through our five core values and how we execute through didn't event the gross system.
The proactive cost measures, we have taken are reflective of our values in a shared gains Sharon pain approach of the rubber will further elaborate on but what I can say here is that I'm very proud and excited that through our approach all move into colleagues are now shareholders in the company, which we feel is driving a tremendous engagement and aligned.
It over teams.
Now, let's move to our normal quarterly results review as you can read in our press release in the first quarter of 2020, we exceeded the top end of our guidance at both revenue and earnings our company delivered over $155 million in revenue, representing a 1% year over year revenue declines reported basis, and a 4% decline.
Line on organic basis, adjusted EBITDA was $28 million into first quarter down 2% versus the first quarter of 2019.
In the first quarter, our book to Bill was 1.06 than we saw strong bookings across the board.
Mostly driven by customers, who wants to secure inventory to protect against covert 19 supply disruptions.
In the first quarter, 58% of our revenue came from our medical markets that are strictly growing long term and grew 6% year over year in the quarter.
On the back of the innovation investments that we've made we view our innovation pipeline as a storm as it's ever been with significant opportunities in growth applications highlighted to you before.
Despite having a large portion of our engineering teams working from home RMP I programs haven't slipped into first quarter of 2020, our new product revenue grew in double digit year over year, our vitality index, which is the revenue from new products logs in the last four years continues to be healthy at over 25% of sales versus.
Mid single digit percentages, a few years ago.
Design wins grew over 10% into first quarter of 2020, and while some customers if temporarily delayed new platforms. We're seeing orders accelerate as we look at it right now we will be able to accelerate our innovation pipeline with multiple products hitting the market ended 2020 ending 2021.
We continue to have the confidence to invest in our innovation pipeline and driver businesses to capture emerging new customer opportunities.
I will let Robert explain the implication of the pandemic your financials and then also look also on our outlook for the rest of the year, but let me briefly touch on what we're seeing in our markets. Obviously the environment is highly uncertain, but there are few high level observational. We can share first it's important to realize that no fences revenue might lag our customers by 60.
To 90 days or sometimes even more so the declines at their customers are reporting all them in their second quarter will likely be a third quarter effect for novanta.
Second with close to 60% of sales and medical markets refueling event that is well positioned for both pandemic world.
Now while in the short term elective minimally invasive and robotic surgery medical procedures have been deferred.
Most of these procedures cannot be deferred for very long given the often.
Chronic and progressive nature of the conditions impacting these patients.
In diagnostics, a nice you markets, we're seeing a relative stable business overall as a rapid uptake in PCR molecular testing patient monitoring and critical care equipment is being offset with a decline of Noncovered 19 related diagnostic tests.
On the industrial side, the bright spot. So far is our electronics related business, which is growing as a result of fiveg high speed networking and cloud based on infrastructure.
The rest of our industrial businesses are expected to move with overall PMI trends, but with different demand curve with for example coding for packaged foods relatively stable and converting for textile end markets being deferred with shelter in place.
While short term the industrial capital spending climate as depressed we believe that in the mid to long term our thesis of secular growth in factory automation and industry forward, although remains intact.
Now, let me turn to our operating segments, starting with the vision segment. This segment predominantly serves the medical market than delivered 5% year over year revenue growth. The book to Bill in our vision segment for the for the quarter was one point 11.
Ended September the index in the segment remained well above 30%.
Within the vision segment, we continue to see nice momentum in our one business unit on the back of the smoking evacuation technology, we reported on earlier.
The Smoky Vecchio evacuation inflated technology is in particular demand in today's climate as medical stuff around the world are demanding as safe coated free work environment.
We secured our leading position in inflator bump technology through design wins and development agreements with multiple minimally invasive and robotic surgery OEM platforms.
Which we expect to launch in the next two to three years as a result, we're stepping up our R&D investments into one business and short term. However, the my as business will be affected by the deferral of elective procedures.
Our detection and analysis business unit within divisions segment, primarily serves the diagnostic testing and patient monitor and markets with RF I'd barcode and machine vision technologies, we're seeing a relatively stable business overall as a rapid uptick in bcr molecular testing and patient monitoring equipment is being offset with a decline of non cove. It.
19 related diagnostic tests.
Moving to precision motion, our precision motion segment declined revenue declined to 20.2% sorry into first quarter of 2020 with a book to Bill of 1.09 and bookings growing 15% versus the.
First the first quarter of 2019.
In the first quarter, we did see an upward trend the demand for Fiveg cloud based infrastructure as well as autonomous vehicles offset by a reduction in industrial aerospace a robotic surgery.
We believe that the long term secular trends with the precision motion segments are very much in fact, we like our position and precise in domestic motion control technologies surfing markets restructure growth dynamics, such as precision automation robotics and robotic surgery markets.
As it relates to the surgical robotics, Mark as we continue to see our technology being validated our position grow with the largest players in the short term however, surgical growth robot procedures.
Our mostly deferred and and recovery of big capital expenditures in hospitals are expected to take some time to recover.
Within the precision motion segment in the first quarter, new product revenue more than doubled from a small base on our design wins grew more than 50% versus last year.
Turning to the performance of our Photonics segment for the first quarter of 2020, our revenue was down 7% driven by laser quantum ended deteriorating industrial capital spending climate.
Laser quantum revenue had a double digit decline for the first quarter of 2020 as expected and as previously communicated due to dynamics in DNA sequencing, which we have.
Widely discussed in the last few quarters.
We expect Govan 19 to Deb demand for DNA sequencing capital equipment into short term as research less labs have largely been closed and clinical test reduced inline with the overall decline in hospital visits procedures and diagnostic tests due to the pandemic.
The photonics segment in the first quarter, so bookings decline year over year by 4% into first quarter with book to Bill 0.99.
Design wins continued their momentum and grew over 50% year over year into first quarter.
As we reported in our previous earnings call. The innovation pipeline Interfyl plumbing segment is the best it has ever been and has been accelerated by our recent arduous acquisition and beam delivery there are still anticipating.
To introduce six new product platforms in 2020, which is double the amount we introduced in 2019.
And which are expected to help us gained share in adjacent high growth application segments.
To wrap up we're very proud of the performance resilience and agility over teams in an uncertain environment.
Ventas overall position is favorable and our portfolio resilient to whether to covert 19 pandemic close to 60% of our revenue comes from medical markets that are resilient strictly growing long term.
Our balance sheet as strong as is our innovation pipeline and our portfolio diversified with exposure to long term secular trends in robotics, and automation healthcare productivity and precision medicine.
We believe that these secular trends will be even more relevant post pandemic.
So in summary, we feel we're well positioned to emerge strong from this crisis with a strong innovation pipeline and in a good position to execute on M&A opportunities, which remains our first priority for capital allocation.
So with that I will turn the call over to rubber to provide more details on our financial performance Robert.
Thank you Matthias and good morning, everyone. We delivered 155.5 million in revenue in the first quarter 2020.
Decrease of 1% year over year on a reported basis and a decline of 4% on organic basis.
As matteis already indicated demand in the first quarter ended up being slightly better than we previously guided largely under the basis that some of our customers were concerned with disruptions in supply chains, and hence requested early shipment of products to build finished good safety stock to weather the pandemic.
In the first quarter revenue continue to shift more towards our OEM customers, who serve medical end markets sales. These end markets rose to 58% of total sales and increased by 6% year over year in the first quarter.
This was despite a double digit decline and the DNA sequencing market in the first quarter.
Key end markets that performed well include our medical consumables business with integrated smoke evacuation and our integrated RF I'd and Barcoding products.
We also saw continued strong growth in new products introduced into the medical end markets, such as our new integrated though our informatics products.
The industrial capital spending environment and the overall economic climate saw declines as evidenced by the latest PMI trends.
Novanta sales to all industrial markets was 42% of total sales and declined 10% year over year in the first quarter.
The decline with broad based across the majority of industrial end markets with many seeing high double digit declines, which is consistent with our expectations.
And what our industrial OEM customers are seeing those same markets.
One area. We are seeing increased demand is with our semiconductor microelectronics customers based on the adoption of Fiveg high speed networking and cloud based infrastructure.
This end market still saw a low single digit decline in the first quarter, but thats a significant improvement for the declines we saw in 2019.
Sales specific to the microelectronics market made up a little less than 10% of our total company sales in the first quarter.
On a geographical basis, our first quarter sales to China were actually up 2% year over year. Despite the disruptions caused by the pandemic.
Sales to the us in Europe were down 3% year over year, reflecting the weakening industrial climate in those countries.
Our overall mix of revenue shifted with only 38% of total sales in the U.S. versus 41% in the first quarter 2019.
As a reminder, the locations of our sales are based on where the product to ship to which can sometimes be different than where a customer is headquartered nevertheless, we feel these figures represent general directional trends.
Turning to profit our first quarter GAAP gross profit was 64.4 million or 41% of sales compared to $66.3 million or 42% of sales in the first quarter of 2019.
On a non-GAAP basis, adjusted gross profit was 67 million or 43.3% of sales compared to 69 million or 43.6% in the first quarter of 2019.
For the first quarter 2020, our adjusted gross margins were roughly flat compared to 2019. The lack of growth margin expansion was mainly impacted by continued growth or a medical consumables product line, which drove unfavorable mix effects during the quarter.
We are seeing record demand for our medical consumables, particularly are those that incorporate our smoke evacuation technology.
This is a key innovation, which will keep doctors and hospital staff safe from infection in the operating room.
Thanks to the incredible efforts of all our employees all of our factories remained open and producing product for our customers.
Despite the significant challenges around lockdown supply chain disruptions travel restrictions and logistics challenges as of today, we are maintaining an extremely low absenteeism from our employees and a high level of engagement.
Moving on to operating expenses first quarter, R&D expenses were 15 million or 9.9% sales compared to 14 million or 8.9% of sales in the first quarter 2019.
We continue to lean into the headwinds and invest in our innovation pipeline.
The current economic climate in our view provides us with the opportunity to take market share and captured significant growth opportunities to drive our growth in 2021 and beyond.
The more significant customer programs remain on track both within Novanta NR customers. Despite the challenges.
First quarter SGN, a expenses were 31 billion or 19.8% of sales compared to 32 million or 20% of sales in the first quarter of 2019.
Moving on to other financial results GAAP operating income was $13 million in the first quarter 2020, compared to 14 million in 2019 and non-GAAP operating income in the first quarter was 21 million or 14% of sales compared to 23 million or 14% of sales in the prior year.
Adjusted EBITDA was 27.6 million in first quarter of 2020 compared to 28.2 million in the first quarter 2019.
On the tax front, our GAAP tax rate was nearly zero for the first quarter of 2020 had deferred from the Canadian statutory rate of 29% driven largely by jurisdictional mix of income and the windfall tax benefits from stock based compensation Awards.
On a non-GAAP basis, our tax rate in the first quarter with 8%. This was more favorable than we anticipated as a result of windfall tax benefits from stock based compensation awards. This only impacts the first quarter and will not reoccur for the rest of the year.
On a GAAP diluted earnings per share was 34 cents in the first quarter compared to diluted earnings per share of 35 cents in the first quarter of last year.
On a non-GAAP basis adjusted earnings per share was 51 cents in the quarter compared to 53 cents in the prior year.
First quarter operating cash flow was 17.8 million compared to 5.5 million in the first quarter of 2019.
This result was driven by good operating profit and a modest reduction our net working capital needs.
Ended the first quarter with growth debt of 217 million and our growth leverage ratio was 1.8 times. Our net debt was 143 million as of the ended first quarter or roughly 1.2 times.
Following our December 2019 Amendment and extension of our credit facility, we extended the maturity date until the end of Twentytwenty for while also reducing our interest expense.
At the end of March 2020, we amended our credit facility again and exercised the accordion option to our revolving credit facility. This amendment increase the revolving credit facility committed under the credit agreement by 145 million.
From 350 million to 495 million and really reset the uncommitted accordion feature to 200 million for potential future expansion.
Because of all these actions are overall liquidity is now 449 million, which which consist of more than 73 million of cash on hand, and nearly 375 million of unused revolver capacity.
This gives us capacity to weather the economic climate and gives us a media capacity at quickly if the right acquisition opportunity presented itself.
The consequence of this action will result in our full year 2020 interest expense being slightly more than $7 million and our weighted average interest rate is anticipated to be around 2.6%.
I'll now I'll take a moment to speak to what we're seeing beyond the first quarter results.
Due to the impact of the coven 19, pandemic and advances business the uncertain duration in the scope of that pandemic and the uncertain timing of the global public health and economic recover recovery, we're not able at this time to reliably estimate the future impact of the current environment, our operations and other financial results.
Including for the full year 2020.
But we can give you a lease some perspective around what we're seeing today in terms of demand.
As we look at the second quarter, the implications of customer behaviors in the first quarter and the economic closures of the worldwide economies in March and April are clearly going to impact our second and third quarter more than our first quarter.
Novanta as revenue can lag our customers revenue.
By 60 to 90 days, so while we are expecting second quarter revenue to be weaker than our first quarter. The majority of the impact would actually be felt in the third quarter.
As we stand here today, we expect second quarter revenue to be in the range of 130 million to 142 million.
The bottom end of the range reflects the risk of supply chain disruptions and or customer disruptions at their factories more than it does demand risk from our customers.
In other words from a customer demand perspective, we're trending to the upper end to the range.
As we discussed before the majority of our products are sold in the capital equipment, which is either for the advanced industrial markets or for the more prevailing medical end markets.
Over the last years, we have relentlessly focused on applications, we feel have secular growth and longevity to them. Knowing we have to your design win cycles and because we want to maximize our return on investment.
As a consequence, and thus far we do feel that most of the revenue dropped we are expecting to see our best characterized as the band deferrals as our customers experience push outs of capital expenditures to conserve cash.
Absent a resurgence of the public health measures taken in April we do not expect them. We do expect the majority of our customers to rebound and return to growth.
Despite the challenges there are many exciting aspects of our business, where we see momentum building particular around new products and design win activities.
We are seeing China's industrial capital spending market stabilizing and some early signs of growth returning particular around fiveg infrastructure investments and laser based material processing applications.
As mentioned previously despite the pandemic impacting China and our first quarter, we're still manage the show growth there.
While we are expecting to see the second and third quarter drop in our medical business tied to the halt of elective surgical procedures for two plus months.
We feel strongly that this will rebound quickly.
Whereas the term elective might imply that this type of surgery is optional and elective procedure is simply one that is planned in advance.
Rather than the one that has done in an emergency situation.
Surgical suites are the profit centers of hospitals.
And when we re emerge from these lockdown the pent up demand from patients will start to drive our consumable growth and then the new equipment growth.
As a point of reference more than 70% of our medical end market sales are tied to surgical procedures, both elective and emergency base.
As this business is expected to come back faster than some of our industrial market. It is possible that sales to medical end markets, we'll finish the year at 60% of more of their total sales.
However, despite our confidence in the business our strategy and the long term growth prospects of the company. We recognize we need to take measures to control our costs improve our cash flow to maximize our profitability without impairing our capabilities disenfranchising, our employees or damaging our ability to reach.
Cover quickly.
Therefore, we have taken the following actions first off we the officers of Novanta have agreed to a 1.6 million or approximately 50% reduction our 2020 cash compensation. This includes the elimination of our cash bonus plans.
And reduction in base salaries.
Second across the entire company, we have eliminated our planned annual base pay increases for 2020.
And most importantly, we have eliminated the annual bonus plans across all of new after for all roles.
But for every single employee of Novanta other than before officers. We have made a special onetime restricted stock unit Grant and April totaling 14.4 million, which is fully vesting in February of 2021.
We decided on the equity grab because we strongly believe this grant will keep employees focus through this time of crisis create an ownership mindset amongst our employees and allow us to maintain our talent culture and our capability. So can quickly recover from the inevitable end this pandemic.
We also strongly believe this equity grit helps to keep our factories running and our employees actively engaged.
Even from work from home environments, while maximizing the company's adjusted EBITDA and minimizing cash outlays.
I should note that because of the accelerated vesting our earnings per share will be impacted by the amortization of this onetime grant for the full year 2020, we now expect stock compensation expense to be approximately 22.5 million.
These changes to employee compensation or just one way we are working to strengthen the profitability and cash flow the company during the economic downturn in other areas. We have also implemented travel bans for our staff globally reduced discretionary spending across our business lines frozen non critical new employee recruiting.
Hiring activity for the year.
Deferred upwards of $10 million and capital expenditures, including the expansion of our talked in the UK manufacturing facility that we mentioned in the last call we.
We implemented a companywide furlough program.
We're deferring cash payments of certain us payroll taxes in accordance with the New Cares Act and finally, we have temporary stop the company's share repurchase program since the end of March.
Our focus over the next few months will be on protecting our capabilities in terms of our employees, our innovation and our customers and preserving our priority R&D programs, while at the same time maximizing adjusted EBITDA and cash flow.
This focus is critical to help us navigate the temporary impacts of the pandemic on our customer demand as well as the incremental cost to operate in these extraordinary talents.
In the first quarter, we spent a little less than 300000, an incremental costs specifically to mitigate the challenges stemming from the coven 19 outbreak.
These costs were incurred to ensure the safety of our employees keeping our factories open and continuing shipping our product to our customers as we look to the second quarter. We expect these costs to be materially higher.
We recognize that predicting the potential disruptions remains a moving target and therefore have analyzed the mall modeled a multitude of potential financial scenarios on the company. The actions. We took thus far were aimed at protecting the company under the worst case scenarios, we can conceive while recognizing the economic consequences of Penn.
Demick are temporary.
Based on this we strongly believe are more than 73 million of cash on hand, and nearly $375 million of available borrowing capacity under our revolving credit facility as well as the anticipated cash flows from our operating activities would be more than sufficient to meet our needs over the next 12 months.
In addition, we believe that the global economies recover we have secured and now have ample cash available to continue to execute and aggressively pursue acquisition strategies.
We're thankful for our customers represent some of the financially strongest companies in the world.
With more than 3500 customers selling into more than 45 different niche application areas. The diversity of our portfolio positions us well the whether the current environment.
Finally in the spirit of never letting at prices go to waste, we ever aggressively institutionalizing and progressing the novanta growth system operating model across our business unit and deep into the cultural fabric of this company.
The Novanta growth system is a common way of working through effect common tools and processes vigorously applied to accelerate and drive sustained growth in operating performance, we feel that by rigorously applying the novanta gross system, we will assist us enormously in achieving our goals in 2020, especially in areas of customer satisfaction speed to market.
Gross margins and inventory optimization.
In summary, we were very proud of the performance of our employees and their commitment to helping us whether this difficult environment and most importantly, I remain excited about our future and look forward to continue to deliver on our commitments to our employees our customers and our shareholders. This now concludes our prepared remarks, we'll open the call up for questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one touchtone phone if you're using a speakerphone. Please pick up your handset before pressing the keys. So it's Joe Your question. Please press Star then too.
Well pause momentarily to assemble roster.
And our first question will come from Lee Jagoda with CJS Securities. Please go ahead.
Hi, good morning.
Hey look at a.
So I really appreciate you try to give us a shape for the year in terms of Q3 likely being the worst of it.
From a revenue perspective from a gross margin perspective.
Typically your margins have been driven more by product mix versus overall volume can you talk about the current expected mix and how that might impact your gross margin understanding that a lot of the incremental costs from covidien, probably hit the cost of goods sold line.
Yeah, so that would be the larger variable that it would be impacting the gross margins as we get through the year. So it's relatively small than in the first quarter they've talked about about 300000, but as we get into the second third quarter.
Well leased in the second quarter that could be upwards of 10 to 20 times higher than that so.
It's a significant.
Headwind that we need to still kind of work our way through which is the variable that really prevents us from going out there with any sort of build guidance on the profitability side.
The gross margin in the first quarter generally have lower.
We would we would hope to improve from here we are focused on.
Driving the the performance in the business to maximize our EBITDA you can't do that through operating expenses alone.
So we do anticipate driving gross margins in order to to achieve achieve our goal here of maximizing cash flows and EBITDA to get into specifics I'd, rather not just because there's too many variables right now that are outside of our control.
That's fair and then switching gears to R&D has the R&D budget in dollars changed versus prior expectations or should we just think about it as the same dollars you're looking at spending to kind of capture some of these opportunities and animal just end up being a higher percentage of current sales.
Yes, let us as matteis, I mean, directionally as I commented in the prepared remarks, I mean or MPCI programs are actually on track.
Despite people working from home as well as our customers working from home what we do see is that at the mix of programs might shift around a little bit in terms of priorities because certain customers are actually accelerating some orders are delaying and so I would say as an aggregate.
We're shooting for a similar amount at being at that the makes much slightly change and and we have also and then intensified our focus on what we call priority programs, given and let's say that certain markets are expected to to have more tailwinds and others in this climate.
Sure and then one last fall just I don't I'll hop back in Q.
You're one of the few companies that's out there continuing to pursue acquisitions in this market.
What are you seeing from I guess, a price competition and then probably more importantly.
Seller willingness perspective at this point.
Yes, I would just say Lee I mean, overall, I mean acquisition as our and remain.
As vital a part of our strategy and our capital allocation.
In the company and we do feel that this climate is is going to create opportunities for M&A.
But you also I'm sure as seeing as elsewhere that yes that that the first half of the year, we will not expect much activity.
Basically for two reasons, one is we want to be and make sure that we stay focused on our own company health and our employees and.
Tail the pandemic stabilizes right.
A bit and second sellers are also in a pause mode right now.
For essentially the same reasons right, but we expect that as the year progresses.
There will be more open as from sellers to consider potential transactions and.
One of their major reasons that we why we swiftly pursued the actions to reinforce our liquidity position that Robert mentioned, including the additional capacity of our credit facility is to be ready to take advantage of the M&A markets right. So when a and opportunity arise as you can expect us to aggressive.
Lee lean in during the second half of 2020 in 2021.
So we're staying very active yet disciplined M&A space, that's that's a way to to characterize it.
Okay. Thanks very much.
The next question will come from Richard Eastman with Baird. Please go ahead.
Yes.
Good morning, midsize and Robert Thank you good morning, Rick.
Matteis just to just too.
Maybe think through the three platforms.
And.
Again were impacted here with the 60 to 90 day lag.
But including new products that you hope to ship in the fourth quarter expect to ship in the fourth quarter. How would you look at the cadence of improvement among the three platforms photonics vision and precision motion.
Slows to recover and.
Yes.
Yes, it's a it's.
It's a it's a tough question Rick let me just answer it directionally in terms of the overall markets and kind of end market based and then not necessarily industry platforms base.
So basically what we what we said in our prepared remarks is that.
Yep, our medical markets, which are close to 660% occur and sales.
Of course, our impact that short term.
And just see our customers being infected pretty materially in their second quarter, we expect that to be a third quarter event for US yes, but we also as we speak you see actually hospitals reopening and so we do expect that hospital procedures to recover.
At the end of the second quarter and into the third quarter.
And as so you'll see Forsee basically medical consumables picking up as a result, and then followed by capital equipment as hospitals, our first want to generate.
Let's say cash flow with procedures, yeah, So thats kind of at a high level from kind of a surgical perspective, 70% of medical business and our customers are based on the elective and emergency procedures in endoscopy robotic surgery, arthroscopy and ophthalmology right. So so thats kind of a so.
Follow I think a very well articulate a trend that that our customers.
Have reported on.
Yes, there is a smaller market AFE ophthalmology, that's that's slightly different it's not.
Super High percentage of our revenue ophthalmology is of course, I doctors and eye surgery, the 50% of that market is private practice based so.
So that will that will follow.
A different different trajectory it kind of similar to dentist's offices, and so much right. So thats. The only exception I would say two thats two that's too that trend of elective procedures. If you don't look at the remaining part of the medical AD business right. It's primarily.
Diagnostics DNA sequencing IC EU markets right and there it's a tale of two cities on one hand, youre seeing products that are obviously being accelerated pretty materially.
[music].
Because of demand for covert 19 related equipment.
But then on the other had you see that as a result of dramatically reduced hospital visits and associated tests right that the noncore hit 19 relate to test our are down materially that did not affect to us is actually in that business.
Organic businesses are relatively stable business.
Throughout the year, Yeah, and then on the in the industrial site.
There's a there's there's a wide range as well depending on on end markets right. So you have on one hand, you see.
It was relatively small exposure, we have to have two electronics and fiveg. So Robert commented that that's less than 10% of our overall revenue.
That is a bright spot right now and we expect that to continue.
We see.
A wide range of industrial end markets that were that were part of and and you see for example.
Yes laser coding for packaged foods is is hanging in there I mean, it's down but it's not down as much as let's say markets that has.
In aerospace component or which is small in our case, but but there are some there some laser additive manufacturing exposure at that has exposure to aerospace obviously that that has impacted.
So I would just say what we've done internally to maybe just summarize it you almost need to drill 45 different demand curves right of each of these end Merck markets.
And and and basically the aggregates.
Takeaway of these demand curves is that we believe that yes, Q2 will be lower than Q1, and Q3 will be lower than Q2.
And and it's too early to come to comment on a add let's say on Q4 trajectory now on your question of innovation.
Strategically as well as practically we believe thats, an asset to have and and we actually believe that in this climbing and we've commented on that in our last earnings call and that hasn't really changed.
That our customers, they're pulling for our innovations and they're looking to introduce and compete and I think strong customer. She this climate as an opportunity to gain share the asset now how much impact that we'll have in Q4 in this climate is really tough to say right, but strategically we.
Feel right that add it provides an opportunity to gain share take hold both leading platforms with very strong customers that we believe has long term secular growth trends. So so for us.
Well, that's why we're not holding back on these investments because we feel that.
These customers and their platforms are variable position. So yeah. Unfortunately, I cannot be more specific on right now that's very good I'll leave a pretty good model, but I don't actually model to 45 different demand curve. So.
Hi, Hi, now.
A little bit yes, you do.
Can you just one last question Robert your comments about the you know the colvin related expenses.
Of 300000 in the quarter and maybe that's likes to to three to 6 million in the second quarter is that being absorbed in the Cogs line.
You are predominantly predominantly in the Cogs why there would be between like three and let's say $4 million I thing.
It's really were kind of end up few percentage points of the total revenue.
And then what portion of that kind of gets recovered.
Remains to be an open question meeting.
Some of that cost is likely absorbed by our customers, but it is what we're seeing in terms of like higher costs associated with logistics, sometimes that's paid for by the customer.
Which is an advantageous situation.
And then theres situations, where.
We have hired decontamination cleaning or higher PV cost and whatnot. So.
We are trying to manage that as best we can and we're also looking at sharing some of that cost with our customers.
Okay, all right and does that does that three to 4 million.
Is that it can be kind of a quarterly run rate does that carry ended the third.
Well I mean, it's really it's tied mostly to disruptions.
From a lockdowns and the disruptions in the airline industry.
Specific around how you freight to and from locations. So.
It's a degree as lockdowns begin to let up and the restrictions began to ease and things begin to normalize doesn't need normalize that much frankly, but just needs to normalize more.
Then the cost began to fall back off so no I don't think it's something that will go with us for the remainder of the year absent some sort of resurgence of the pandemic in the back half of the year. So yes, I think it's something that is definitely a temporary.
For us to deal with and moving stuff around and.
Particular, not only in the United States, but with our supply chains spread out globally.
Dealing with how to get products out of countries is sometime been an expensive endeavor.
Okay, great. Thanks again for the questions.
Yep.
Our next question will come from Brian Drab with William Blair. Please go ahead.
Hey, good morning, Thanks for taking my question Hey, Good morning, Brian.
Can you just to kind of in spirit of housekeeping here as you kind of small questions, but do you have an idea.
For us how much was pulled forward.
From the second quarter isn't hard to parse that.
It's hard to parse it out but you know.
We we gave a range of we'd beat the range, a little bit and I think.
Why we came in on the beating the range and is more as a consequence of that.
I would I look I again, I made a comment as we looked at that second quarter, our demand profile would say.
We're at the upper end of that range, meaning that the bookings are there in support of their backlog is there to deliver on that up or into the range. We provided a broader range because.
It's sort of what I just comment with Rick there's been a lot of disruption on moving product around logistics getting product in and out of countries.
And then sometimes with some of our customers Theyve had covert case in their factory enough shutdown the factory and there and we get caught in that in between pay stage, where we can't ship the product out to them.
And so it's really kind of taking that into account.
So if you think about it from that context.
Even out those two quarters little bit more.
Maybe that's a better perspective on the on the overall demand.
Yes, I think thats. It does a good way to look at it any better saying that I would say Brian is that yes, I mean again, our book to Bill was 1.06 for for the first quarter. We typically comment that on average is going to be and you can expect that to be one I mean certain quarters can can swing around a little bit, but if you didn't look.
In two to three segments right you base can you see that precision motion and vision had book to bills have hired have won and photonics of about one actually 0.99. So that's another clue on aware, where and how much of animated pull forward, we saw at but I think.
Robert is saying is right you just need to look at kind of those two quarters combined to kindness, where they make and make your judgment.
Okay. Thanks, now that that's really helpful.
And then can you talk a little bit more about business that may have arisen specifically from the outbreak you took but some of the co bid related testing you mentioned some other categories.
Is this.
Is this revenue related to the crisis activities meaningful and sustainable some of it sustainable and.
Creating new long term opportunities for the company.
Yes, I mean, that's.
That's a question right, we should lets say first and foremost we are extremely excited about the smoke you've actually affect relation is a player technology that we have even pre pending that make we commented on this because it's a it's.
It's a it's it will we feel it as reuptake technology, where we are the technology leader, we see penetration and adjacent markets, including robotic surgery. So so pre cohort. We we commented on that this is a multiyear growth engine for us and as a result, we're stepping up and our investor.
As into his area.
And now during February 19, and as we're in the Middle of this crisis I mean, what customers are telling us and actually hospitals is that yes staff.
Is demanding as smoking evacuation technology, because it basically guarantees that filters out and see a two gas that comes out of the patient right. So so it is a way to keep medical staff safe and you can kind of can understand that this might become a part of a requirement and actually there are.
Independent.
Medical bodies that are highly recommending and or even at the ash even strongly suggesting.
That this should become a standard of care going forward. So there are signs that this type of category Bobby here to stay and actually that becomes part of a new normal now on the other and of course, you see demand on patient monitoring and I see you related equipment at that particularly is related to covert.
19.
That we feel is more temporary now of course.
Countries will will increase their strategic stockpiles of I see you capacity and maybe that has some positive tail, but we're not going to count on that so I would just say that.
That has helped basically the way to think about it and a diagnostics and I see new business.
And detection on analysis business that has helped to stabilize the business as the.
A large chunk of Noncovered 19 related diagnostic test basically had a material decline now that is temporary too. So those two just evened out.
And so so it helped to stabilize the business. We don't think it's necessarily a strong strong recurring trend.
On the smaller side I would say just fiveg cloud based infrastructure I mean, it's a small part of our business, we've always being careful not to have at a large exposure to it.
And did you kind of course expect that yeah investment was in and high performance computing cloud based infrastructure share is going to be a longer term trend and fiveg as well. So so those are things that we're seeing anything overlooked if you look beyond the kind of that fees.
Results the of the investments into November stock I think we still very much intact and if anything it could could accelerate right. So the need for health care productivity and the need for precision medicine, and the need for automation and robotics.
To to make supply change more resilient and core Cove, it resilient and as we feel is a trend that is that is very much intact. As so I think macro wise. That's how we're looking at it I think we're playing in and markets that are structurally going to remain very relevant.
It's been downtick.
Okay. Thanks, Thanks for all the detail in just one more question I haven't my notes and.
I can't remember somebody said, specifically or an impression that we have but for the first quarter expecting about 33 million.
In SGN a did about 31.
And.
Just wondering if you can give us any insight into I.
I know you mentioned some cost cutting in limiting costs, but what should we.
Well.
What part of that discrepancy between my estimate and what you end up doing was related to cost cutting and kind of what should we expect for the run rate going forward excluding stock.
So on that you mentioned.
Yes, I mean, obviously as you.
I don't I know you want to fill out of your model, but.
Yes, we want to be let me elaborate and Directionally is all I would expect but yet.
So I lift the cost cutting that we've done it is most of those actions started.
At the end of March and therefore benefit us on a on a Q2 Q3 basis. So.
We'll actually in a step down as we get into the second quarter, most likely as a consequence of some of the cuts in discretionary spending some of the reductions and.
And travel in the bands around that as some of the reductions and compensation expense.
Offsetting that would be the graph, but for the most part you should expect it to ticked down a little bit.
Okay. Thanks.
Just mentioned too I think that the issuance of that grant was really a brilliant idea I think that's a great great move for the company. So.
Yes.
Yeah, we agree here thanks, Brian.
This concludes our question and answer session I will like to turn the conference back over to Matthias Gloster for any closing remarks. Please go ahead.
Thanks, operator, so to summarize into first quarter of 2020, Novanta delivered a solid performance in an uncertain macro environment, we're very pleased with our positioning and performance over portfolio and proud of the performance and agility over teams Novanta is not immune to the impact of pandemic, but we're.
Well positioned to whether to covert 19 crisis or balance sheet as strong as is our innovation line up.
And our portfolios diversified with exposure to long term secular trends and robotics and automation healthcare productivity and precision medicine.
While the short term outlook is uncertain with a health economic we are investing into the headwinds and remain focused on the long term growth drivers in our business on the back of the macro trends in industry forward, although precision medicine and minimally invasive surgery.
In closing I would like to think our customers our employees.
And our shareholders for their ongoing support I'm, particularly grateful for the dedication and strong contribution of our teams have committed novanta employees that are showing tremendous agility and resilience during this.
During these unprecedented times.
We appreciate your interest in a company and your participation in today's call I look forward to joining all view on several months on our second quarter 2020 earnings call. Thank you very much. This call is now in Europe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.