Q2 2022 Novanta Inc Earnings Call
Good morning, My name is <unk>.
And I will be your conference operator today.
At this time I would like to welcome everyone to the <unk>.
Incorporated's 2022 second quarter earnings call.
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I would now like to turn the conference over to Ray Nash Corporate Finance leader for Nova. Please go ahead.
Thank you very much good morning, and welcome to <unk> second quarter 2022 earnings Conference call I Am Ray Nash corporate Finance leader of Nevada with me on today's call as our chair and Chief Executive Officer, Mathias Gloucester, and our Chief Financial Officer, Robert Buckley.
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, Nevada Dot com.
Please note this call is being webcast live and will be archived on our website shortly after the call.
Before we begin we need to remind everyone of the safe Harbor for forward looking statements that we've outlined in our earnings press release issued earlier today and also those in our SEC filings, we may make some comments today, both in our prepared remarks and in our responses to questions that may include forward looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause.
Our future results to differ materially from our current expectations any forward looking statements made today represent our views only as of this time, we disclaim any obligation to update forward looking statements in the future even if our estimates change. So you should not rely on any of these forward looking statements as representing our views as of any time after this call.
During this call we will be referring to certain non-GAAP financial measures a reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release.
To the extent that we use non-GAAP financial measures during this call they're not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Bester Relations section of our website. After this call.
Now pleased to introduce the chair and Chief Executive Officer of Nevada, The tightest cluster.
Thank you Ray good morning, everybody and thanks for joining our call November achieved impressive results in the second quarter of 2022, we delivered another quarter of terrific financial performance with double digit growth in revenue bookings adjusted EBITDA and adjusted EPS.
And we ended the quarter with another record level of backlog.
Continue to see very robust demand from our customers in the medical and advanced industrial markets we serve.
No ventas portfolio is well positioned in medical and advanced industrial applications with long term secular tailwind such as robotics, and automation health care productivity and precision medicine.
We continue to invest for growth in a disciplined matter to strengthen our commercial teams, our innovation pipeline and manufacturing capacity to capitalize on these two weeks.
In the second quarter, the company delivered $215 million in revenue, representing 29% year over year revenue growth on a reported basis and 13% growth on an organic basis and up 5% on a sequential basis.
Our operating profit in the second quarter was fantastic with adjusted EBITDA of $45 million up 22% year over year.
And adjusted diluted diluted earnings per share of <unk>, 78 up 26% versus prior year.
We saw strong demand and healthy orders across all segments and in many of our applications with E. Check me on having solid book to bill in the quarter.
In the second quarter, our overall book to Bill was 134.
With year over year bookings growth of 25% versus the second quarter of 2021.
We ended the quarter with a record backlog of $653 million.
Up 11% sequentially as demand continued to be gated by supply constraints.
The excellent year to date financial performance gives us confidence to raise our financial guidance for the full year, which Robert will cover in detail in a few minutes.
We're doing this in the face of significant amount of uncertainty in macroeconomic and supply chain challenges, we feel that where we play and how we win is an important part of our success.
We build and grow quality businesses with proprietary IP and attractive.
Secular growth markets with vibrant culture and great people.
And I just wanted to say how proud I am of our teams around the world.
I'm extremely pleased we are with the teams exceptional operating performance using the an event the gross system tools in this uncertain environment.
Now, let's turn to what we're seeing in our markets, where we see ongoing strength in multiple application areas in the second quarter, our sales to advanced industrial markets saw 42% growth year over year and 5% growth sequentially.
We continue to experience higher demand in automation and robotics markets, specifically factory automation.
Battery and electric vehicle production, UV and increased adoption of automation, enabling technologies.
We believe that the penetration of robotic automation applications is still rather can figure, though with adoption increasing due to multiple drivers such as increased productivity.
Irobot utility onshoring and labor shortages.
Turning to our medical end market for the second quarter of 2022 sales to medical applications grew 16% versus the second quarter 2021, and 6% growth sequentially. During the quarter, we saw very strong orders and shipments to many of our medical OEM customers with particular strength in surgical robotics DNA sequence.
Our medical consumables for minimally invasive surgery, all of which saw strong double digit growth in sales year over year.
We believe that the penetration rate of these technologies is still low with an attractive long term growth trajectory and with no vendor content steadily increasing.
It was also encouraging to see the strength in medical consumables, which supports a broader improvement in elective surgical procedures.
We expect that medical sales in minimally invasive surgery procedures will continue to rebound gradually throughout 2022 as hospitals are battling staff shortages.
Our longer term outlook on the minimally invasive surgery market remains bullish, particularly with our playbook of expanding share with our unique product offering of integrated smoke evacuation insufflator.
From a regional perspective, we saw strong demand across all our major geographies in the second quarter, we sold 27% year over year revenue growth in China help our ATI acquisition, which saw strong electric vehicle production of robotic demand.
Our China revenue, excluding acquisitions was roughly flat year over year, which was remarkable given a significant COVID-19 disruptions and lockdowns in China and continued supply constraints are.
Our backlog and to manage China is very strong help our increased exposure to electric vehicle production micro machining and electric vehicle battery production.
Moving on to other regions sales in Europe grew 20% in sales in the United States grew 46% year over year now let me touch on some of them event those strategic growth metrics. As a reminder, right now these metrics exclude any impact from our ATI and IMS acquisitions.
For the second quarter, our vitality index, which is revenue from new products launched in the last four years continues to be healthy at above 25% of sales with year over year, NPI revenues up low double digits versus last year.
Spite some modest delays in some of our programs, which we spoke to previously we see other programs that are progressing nicely.
And our new product pipeline for 2022 and beyond remains very healthy we continue to invest in R&D with discipline in order to capture the many mid or long term opportunities with differentiated offerings in high growth markets.
Moving on in the second quarter design wins for the overall company increased more than 20% versus the prior year we.
We saw strong design wins and the majority of our businesses and we are excited about the platforms, we're winning in attractive high growth applications, such as surgical robotics laser additive manufacturing micro machining U V in electric vehicle battery welding.
Before wrapping up I'd like to give you a brief update on Los Angeles acquisition and integration activities are a T. I in IMS businesses saw strong performance for sales and bookings in the second quarter. We continued to be very pleased with their contribution of strategic fit to Nevada and are very pleased to see the way our teams are collaborating with our other businesses and elevate.
The capabilities of the entire organization.
As for the rest of our M&A pipeline acquisitions continued continue to be the primary focus of November as capital deployment I mean.
Continue to work on a very active pipeline of opportunities.
So in summary, despite the significant short term supply chain challenges and the uncertainty of the macroeconomic environment, we feel excellent about our second quarter results and continue to see strengths in the second half of the year. We believe an event those long term strategic positioning is extremely strong.
Continuing to broaden our exposure to medical and industrial applications that have long term secular growth trends, such as robotics, and automation health care productivity and precision medicine.
So with that I'll turn the call over to Robert to provide more details on our operations and financial performance Robert.
Thank you Matthias and good morning, everyone. Our second quarter non-GAAP adjusted gross profit was $98 8 million or 46% adjusted gross margin compared to $76 9 million or 40.
Gross margin in the second quarter of 2020 one.
For the quarter adjusted gross margins were flat year over year and sequentially, considering the environment of high inflation supply chain shortages and currency exchange volatility we feel quite good about this outcome, we continue to experience supply chain shortages and inflationary pressures with semiconductor.
Parts, but we're also seeing solid productivity from the deployment of advanced the growth system, and we are experiencing the impact of our pricing initiatives, helping to offset the inflation.
Moving on to the second quarter R&D expenses were 21 6 million or roughly 10% of sales second quarter SG&A expenses were $40 5 billion or 18, 8% of sales.
Sequential increases in operating expenses, which were in line with prior guidance were the result of the impact of variable compensation programs as well as planned R&D investments adjust.
Adjusted EBITDA was approximately $45 million in the second quarter of 2022 or 21% adjusted EBITDA margin, our adjusted EBITDA performance beat our expectations and our previously issued guidance.
On the tax front, our non-GAAP tax rate in the second quarter 2022 was 18% this.
This differs from the statutory rate driven mainly by jurisdictional mix of income.
Our non-GAAP adjusted earnings per share was <unk> 78 cents for the quarter compared to 62 cents in the second quarter of 2021, an increase of 26% year over year.
The strong increase in adjusted EPS was achieved despite the higher financing costs and higher tax rate.
Second quarter operating cash flow was approximately $24 million, which was in line with our expectations.
Second quarter cash flow continued to be impacted by anticipated increases in working capital, which was mostly driven by higher inventory purchases to mitigate some of the supply chain disruptions.
Cash flow was negatively impacted by two and a half million dollars in higher cash taxes related to a change in the U S tax law, which impacts the deductibility of R&D costs.
Finally in the second quarter, we purchased approximately $10 million worth of shares at an average price of $119 a share when the stock weakened due to macroeconomic conditions.
We ended the quarter with gross debt of $413 million and gross leverage ratio of two four times, our net debt was $312 million.
I'll now turn to update about the performance of the operating segments.
First I'll start with the precision motion segment.
This segment experienced 93% year over year revenue growth in the quarter reported growth was heavily impacted by the ATI and IMS acquisitions in.
In the second quarter. These businesses contributed approximately $35 million of sales, which was in line with our expectations.
These businesses continue to perform very well the integration is proceeding on schedule and they continue to offer very exciting near term and long term growth opportunities for Nevada.
Excluding the acquisitions precision motion still grew 9% year over year. The overall book to Bill ratio in this segment was 1.1 in the quarter.
Excluding the impact of ATI N I M S. The precision motion new product revenue grew 40% year over year. It was over 25% of total sales for the segment.
Design wins for the second quarter were up double digits versus the prior year.
Adjusted gross margins for the segment came in around 50%, which was down year over year, but in line with the expectations that came as a result of some dilution from the new acquisitions.
This segment continues to show a very strong impact from deploying to the vantiv growth system to structurally improve gross margins.
Turning to our vision segment. This segment predominantly serves the medical end market in salt revenue growth of 3% year over year, which was slightly better than our expectations.
As we said in the last call the volume of elective surgical procedures is gradually started to return which helped sales performance at our minimum invasive surgical business.
Offsetting this was the supply headwind in our jadeite business, which experienced significant part shortages that temporarily cause a decline in their sales, but not in their demand.
The net impact of these dynamics was modest growth that we saw in the segment.
Though the supply shortages at Jay back are resolving we expect these dynamics to persist for at least another quarter.
The vision segment saw a healthy book to Bill of 132 with bookings increased 18% year over year.
Italian death in this segment.
It remained around 30% of sales.
Design win activity in this segment increased strong double digits year over year in the quarter as the segment continues to deliver strong customer wins and attractive application areas.
Finally, turning to the Photonics segment for the second quarter of 2022, our revenue was up 11% year over year.
This segment continues to experience strong customer demand in the advanced industrial applications in DNA sequencing.
The Bill in this segment was a fantastic 1.63 in the second quarter with bookings growing 25% year over year.
The excellent results demonstrate the sustained demand we see in our beam steering and light engine products, although the production move.
Our Taunton U K facility is now fully complete resulting in more supply of optics for our products.
<unk> one of our critical electronics vendor experienced a fire in their factory, reducing our supply of parts.
However, we expect to mitigate the majority of the electronic parts shortfall due to the fire and continue to show strong growth in the third quarter.
I cannot be more impressed with our supply chain and manufacturing teams performance demonstrated by the extraordinary efforts to overcome yet another challenge.
Within the Photonics, new product revenue stayed strong at 25% of sales in the second quarter design wins year to date are up double digit year over year, driven by excellent platform wins in applications, such as laser additive manufacturing micro machining and <unk> lithography.
The photonics segment experienced.
Adjusted gross margins of approximately 46%, which was down year over year, but in line with our expectations.
Gross margins experienced temporary pressure from the tort move in our electronics vendor, who at event, who had a fire but.
But we expect gross margins in this segment to continue to expand in the second half of the year, both sequentially and year over year as we recover from these issues.
Turning now to guidance overall, we expect macroeconomic environment to continue to follow the prevailing trends.
We expect inflation supply shortages, particularly around electronics and volatility with foreign currencies to continue and.
And clearly there are signs of economic menu back at manufacturing activity slowing, particularly in China, and Europe as well as some moderation in certain parts of the semiconductor market.
Despite all of these factors, Nevada is a healthy outlook for the remainder of the year supported by our record backlog and the ongoing excellent execution of our committed teams.
So starting with revenue guidance for the third quarter of 2022 as we stand here today, we expect GAAP revenue in the range of $214 million to 216 million, which would imply revenue growth of 20% to 22% year over year.
The overall range in guidance is driven by both electronic parts shortages and foreign exchange headwinds and not underlying demand.
On a segment level.
In the third quarter, we expect photonics segments will be largely flat sequentially on a dollar basis, representing organic growth of greater than 25% year over year.
Customer demand remains very high in this segment and it has this business is governed solely by electronic part shortages.
The vision segment is expected to be up slightly on a dollar basis in the third quarter similar seeing similar dynamics as we experienced in the second quarter.
The minimal invasive surgery business line is expected to continue to see growth in medical consumables due to the recovery of elective surgical procedures, whereas our <unk> business line continues to improve from its parts availability issues.
Slowly.
Finally, our precision motions segment is expected to be down slightly on a sequential basis due to seasonality with the ATI business line, but up significantly on a year over year basis.
We continue to see strong organic growth later motion business line and the ATI business line, despite significant part shortages in both businesses.
For the full year 2022, our strong first half and continued strong backlog gives us confidence to raise our guidance. We now expect GAAP revenue in the range of 848 million and $852 million, which implies revenue growth of 20% to 21% year over year.
Moving on to overall Novartis adjusted gross margins, we expect gross margins in the third quarter to be approximately 46%, which would be robust margin expansion versus prior year.
We expect third quarter gross margins to see similar dynamics sequentially. Although there may be some segment by segment variations as teams tackle unique impacts from the multitude of challenges related to supply chain.
For the full year of 2022, we expect that Novartis adjusted gross margins to be approximately 46%.
Which represents close to 100 basis points of expansion year over year.
In this challenging environment, expanding margins would be a huge accomplishment.
Through our continued focus on new products, which are launching with gross margins above the company average as well as significant investments and progress with the Nevada growth system across our business units and our pricing strategy focused on sharing the inflationary pressures and supply chain disruptions with our customers. We feel confident we are on a path to continued and sustained growth.
Margin expansion this year and the next.
Turning to R&D, and SG&A expenses, which were up $62 million in the second quarter. We expect are expected to be approximately 63 million to 64 million in the third quarter.
Which is higher mainly as a consequence of recent acquisitions and higher variable compensation and timing related to investments in new product development.
We continue to invest in R&D, even with the macro macro economic uncertainty because of our confidence in near term customer opportunities, we are pursuing and the expected launch cycles of our customers new products.
Depreciation expense was 3 million in the second quarter that should be very similar in the third quarter stock compensation expense, which was $5 million in the second quarter would be similar in the third quarter.
For adjusted EBITDA.
For the third quarter of 2022, we expect a range of $43 5 million to $45 5 million.
The full year, we now expect adjusted EBITDA in the range of 177 million to $180 million higher than previously issued guidance.
Interest expense, which was $3 million in the second quarter would be approximately $4 million in the third quarter, driving driven by rising interest rates and higher debt balances.
We expect non-GAAP tax rate to be approximately 16% in the third quarter absent significant changes in the jurisdictional mix of income or other variability in our eligible tax benefits.
Diluted weighted average shares outstanding will be approximately 36 million shares for diluted for adjusted diluted earnings per share. We expect the range of 71 to 76 for the third quarter for.
For the full year, we now expect adjusted diluted earnings per share to be approximately $2 95.
To $3 <unk>.
Finally, we expect operating cash flows to improve sequentially in the third quarter versus the second quarter as we stabilize our inventory buys.
Also of note in July we closed the earn out to shareholders of hei, resulting an additional payment of $45 million.
For a total purchase price of $214 million, we intend to finance this with both cash on hand, and our credit facility.
As always this guidance does not assume any significant changes in foreign exchange rates. However, it is worth noting that the currency markets have been very volatile recently and this has impacted the second quarter results, including material impact on our reported revenue growth and cash flow.
Given the continued swings in currency exchange rates will likely impact our growth in the third quarter at a similar order of magnitude and this is factored into our guidance.
In summary.
Nevada's performance in the second quarter of 2022 with excellent we saw double digit growth in sales bookings adjusted EBITDA and adjusted earnings per share.
The company is seeing strong demand across its applications and markets and we hit another new record high for sales order backlog and also our adjusted EBITDA. Our teams continued to impress with new innovations as well as their ability to help the company managed through difficult supply chain challenges and Covid lockdowns.
We also continue to see continue to see below market labor attrition rates and we're seeing great success at attracting top talent.
And we continued to deliver strong financial results with a very solid full year outlook. Despite some fairly significant challenges with global supply chains semiconductor shortages inflation, China Covid Lockdowns war in the Ukraine currency fluctuations some slowdown in the microelectronics.
<unk> in general Makar macroeconomic uncertainty.
We remain very excited and motivated about our ability to serve our top customers in the medical and advanced industrial end markets and the innovation pipeline. We are developing in partnership with our customers. We remain very grateful for the outstanding performance of our employees and their tireless efforts to help us be successful in a very challenging environment. We look forward to continue to deliver.
We're on our commitments to our employees, our customers and our shareholders.
This prepare this concludes the prepared remarks, we'll now open the call up for questions.
We will now begin the question.
Sure.
To ask a question you May press star.
And then one on you touched on phone.
If youre using a speakerphone please pick up your handset before pressing the key.
Your question. Please press Star then two.
And our first question will come from Lee Jagoda.
Please go ahead.
Hey, good morning.
Good morning Lee.
So just starting with the the sequential increase in backlog.
Can you kind of parse out how much of that is volume from existing OEM products that your customers are just trying to get out the door.
Versus potentially some initial sell in for some of the new products in the pipeline and to the extent of it.
Any of the ladder.
Is there a quarter one quarter to quarter three quarters out from now where you expect that backlog to relief or is it really just supply chain constraints holding everything back.
Yes, Lee this is matthias it it's primarily supply chain constraints holding the backstop back we'd just demand is just outstripping our ability to supply and you know despite all that were delivered very very strong result, so.
So let me start by saying that the other question, we havent really disclosed display in our sequential backlog and kind of existing customers and.
And new opportunities, but it is fair to say that as we continue to report on design wins that are incremental to our business.
Right.
So it will be a mix and of course also a day increase.
And I'd say exposure over a business to high growth application. So it's being both in the right spot, which then drives the existing business to move faster as well as winning.
Gratulate, new business and increasing content in those higher growth markets.
Got it and I think I know the answer to this question, but I have to ask it anyway in terms of.
Your customers order patterns I assume.
We're not seeing evidence of safety stock or over ordering and its just ordering to demand and you can see that in there their inventories.
Yeah, that's right I mean, we do not see much evidence of over ordering quite frankly, so many of our customers has given us feedback that they are kind of hand to mouth with quite frankly with their suppliers, including us.
And and they're shipping all finished units as soon as they can complete them now of course, we do have less visibility what happens further down the chain and we're watching that closely but again at this moment, we do not see much evidence of over ordering so.
Overall, we have a large backlog.
And we cannot keep up with the demand. So yeah. Our focus is crush strength by reducing that past due backlog to our customers because they they really desperately need our products.
Got it one more for me and I'll hop back in the queue here.
Just I know you had mentioned youre seeing an uptick in the warm consumables, just driven by elective procedures.
What needs to happen to kind of see or start to see an uptick in the <unk>.
Equipment side, and when do you see that kind of playing out.
Yes, I mean, that's tip.
Typically the logical sequence D day procedures need to go up first and that typically will be followed by capital.
Purchases as hospitals need to bring more capacity online, we do see a healthy hospital capital spending environment.
Customers are reporting on that as well so it will be gradual a logical next step to falloff and and so I think we're very encouraged by what we see happening and what we expect it to happening is.
Is the sequential increase of and gradual rebound of the electric procedure rates, which continue to we expect to continue to to progress in the second half of this year and.
And just to be clear I mean, the big backlog do you have here if I look at the warm warm equipment, which should be an important growth driver over the next two three years I would assume that pieces under indexed versus all the rest of the stuff in the current backlog just because we haven't seen those orders yet.
Yeah, that's right. So so again, we expect that that demand will continue to build gradually in the in the foreseeable future, but again if you look.
Short mid long term.
As we commented in our prepared remarks, we feel very good about the future of that business.
We're gaining share with our smoke evacuation insufflator.
Both in the laparoscopy as well as robotic surgery markets and we're also expanding share in <unk>.
Pumps for arthroscopy, so all of that yes.
Yes, it makes for a very exciting future of that business and.
Yeah, we're just what Youre seeing right now is as hospitals are just battling through staff shortages, which we expect over time it will resolve itself.
Got it that all sounds great. Thanks, very much guys.
Sure.
The next question comes from Brian Drab with William Blair. Please go ahead hi.
Thanks for your question.
And.
I'm, just thinking back to the back half of 2019 when.
<unk> is in China, Europe business slowed down in Germany was.
A challenge for you.
And can you talk just a little bit about.
Comparing that market environment to what you're seeing now in China, and Europe and and.
A lot of differences there, but I just love to hear you talk about that and how that.
Influences, how youre viewing.
During the second half of 'twenty two.
Yeah.
Yeah, I mean, it's hard to compare quite frankly bit of course, when you put yourself into a second half of 2019, we just had a massive trade wars and uncertainty on where.
There you know trade tariffs would land and and therefore best great people stop stopping investing right and that had impact in it in multiple end markets.
Right now what we're seeing is we're we're emerging out of them pandemic and.
You know in areas like automotive automation, and robotics, where there's secular growth trends that are accelerating that we're there already but they're they're accelerating collect post pandemic.
And we continue to see demand for our medical and DNA sequencing products. It also are kind of entering into the next phase of their adoption. So we.
We feel that quite frankly, where we put our business.
You know, including acquisitions, we have higher exposure to markets that have.
Waiting sequential tailwind versus where we were in 2019. The other thing that I would say is that we have a higher.
Percentage of new products that are coming to market. So in 2019, if you recall.
Yeah, we just did some technology acquisitions, but we're now seeing the impact.
All the product pipeline gradually starting to appear.
Latter part of this year in 2023, so I would just say yeah, where we're.
We're on our front so from feet, so to speak and dealing with the challenges.
Head on and being in the right spot and so we're where we are and where we play and how we win is really essential now of course.
What is maybe a similar and we're not naive as of course there are.
Signs of slow down and in some parts of the semiconductor market of course everybody's reading the newspapers about the insert in tea and of course, we're watching that very very carefully.
But what we can do is of course place our business in the right bright spots. So we can ultimately serve and thrive through well.
Sure be some some additional challenges coming our way in the future.
Got it thank you and then.
Can you comment on where you are in the in sourcing of the one consumables still on.
Target for getting the margin expansion there.
Yeah. So first I would say that the in house manufacturing facilities are done have done an excellent job of expanding margins and continuing to bring more and more into it.
<unk>.
Because of the way their manufacturing footprint works getting that volume in Israeli.
What are the keys to pull it out of our contract manufacturers and bringing it in house that allows us to better leverage the fixed cost structure that we have there and thereby expand the margin profile.
Simultaneously pursuing some opportunities that are external in nature.
And we have a couple of different avenues. There that we are continuing to work we feel pretty good that at least one of those.
We will come to fruition relatively soon and then that will enable us to start bringing even additional product in house to expand the margins. So at this stage I think we feel pretty good that theres enough options in front of us that we can start to continue to bring product in house and expand the margins.
Okay. Thanks, very much I'll pass it on thanks.
Thanks, Brian .
The next question comes from Rob Mason of Baird. Please go ahead.
Yes. Good morning, I wanted to go back to I guess the question around the backlog.
And understanding that.
Your customers may be somewhat hand to mouth.
Currently.
But is it fair to assume there are some inventory stocking orders.
Within your your backlog.
<unk> hundred 53, and then I am curious if is there any way to give us a percentage of what you would think would be shippable next 12 months' absent any kind of supply chain constraints.
Well so apps, they're you know most of it is.
Super Bowl.
Walter the shippable in the next 12 months, it's just.
It's all being held back with the supply chain constraints themselves.
Alright, so theres nothing in there that we don't have any backlog that's accountable and.
And we don't have backlog that scheduled out greater than a year right.
Being recorded in that number so that's all you know 12 months kind of.
Demand flows it is fair to say that there are some.
Request to try to build safety stocks, there were nowhere near those levels of delivery.
So we're not able to do that and so we're more and try to prevent wind downs at our customers in their manufacturing processes and we are about building stock if we were to estimate it.
I am sure about 20% of it is definitely tied to stocking.
Because they don't really have anything whatsoever on their shelf.
But we're nowhere near to the delivery of that.
So it does provide us at least as we look at 2022. It provides us with some confidence in the revenue numbers should be relatively firm regardless of some macroeconomic conditions and the other thing that I would say Rob is that we do expect a kind of our bookings and our book to be able to normalize right because I do.
Do think the the backlog represents.
Solid coverage for our customers.
You need to deliver on that backlog.
But yeah. So we again, we expect book to Bill in bookings to normalize from here onwards.
Okay understood.
You mentioned price a couple of times, just perhaps getting a little bit better traction as that works through the.
The backlog as well where it could you just update US where you think you are currently on a on a price cost metric you know positive negative or.
Just where we sit currently.
Yes.
Lots of fees has always been one that we are we're leaning in hard on our Nevada grow system, which is about driving material productivity and labor productivity in our manufacturing facilities, and then coupling that with a pricing strategy that focuses on sharing some of the inflationary pressures. So we have not taken the stance that our customers.
Really have where they've dramatically raised price in an effort to get margin expansion on top of the inflationary pressures that they have we have not taken that stance.
What we've really done it said, okay. The Nevada gross system is going to drive X amount of productivity pricing is going to drive Y amount in the combination of those two things will allow us to expand our will allow us to do at least neutralize the inflationary pressures and then the introduction of new products at higher gross margins.
Will allow us to expand those gross margins further.
So as a net that youre seeing that in the results first half of the year.
Of the 46% gross margins, if we look at the back half and the full year, we're going to drive gross margin expansion of 100 basis points. That's a combination of those activities, Nevada grosses.
Our pricing strategy that focuses on sharing some of that cost and new product introductions, and then frankly driving some of the consumable in house.
Sure sure Okay.
Question I had was.
You know obviously.
Uncertainty, particularly in Europe .
And then particularly in and around their energy situation, Germany.
It seems to be ground zero for that.
Concern it seems like.
And given your facility there I'm just curious how you're approaching that.
That dynamic as we go into the back half of the year and then early next year of what perhaps you can do to make sure that you've <unk>.
Related yourself protected yourself against.
Any kind of interruptions.
It may come down that way.
Yeah. It's a great question what happens if the grid goes down is not an easy thing to mitigate.
So yes, let's presume that there's some energy production based upon what they can get it.
I think we've taken a number of actions so.
With everything from building and backup generation to.
Reducing our over energy consumption the facility in Germany is ISO 14000 145001 at focus is probably leading the way from an ESG perspective. So they continue to look at ways to reduce their energy consumption.
We've also built in some redundancy into our heating systems and so we can pivot to a multitude of different fuel sources, depending upon where the shortages might lie. So if there is a shortage of natural gas we can pivot to oil if there's a shortage of oil we can pivot again.
And so there's a multitude of different angles that we've invested in to try it out of AD that redundancy that robustness.
And we're also simultaneously trying to build as you know or acquire additional capacity.
V V. You know an acquisition strategy. So there's a number of different tactics that we're taking to try to increase that redundancy in that facility.
Very good thank you.
Our next question comes from an affiliate of Barron Berg. Please go ahead.
Good morning, good morning, guys.
I was hoping to focus on precision motion for a bit.
So that that's growing organically very strong on a pretty tough comp are much better than I was expecting.
Now you have this M&A, that's going to roll into your core growth.
Kind of starting next quarter, but definitely in Q4 and I'm looking out entirely it's hard to.
You talked a little bit about the cyclical versus secular in some of your businesses, it's hard to know.
To determine what is the long term growth rate for this kind of.
Sort of a new segment as we exit the year can you can you help us kind of think about that and what are the puts and takes going forward.
Well.
So we've always kind of said that the overall end markets in which we participate in are there's 5% to 7% organic growth profile and that others are a consequence of some of the new things that we're doing the innovation and the design wins.
Product introductions and what we've.
We've been we've been driving that kind of higher single digit organic growth.
Contribution obviously, we've been outperforming that and a number of different areas of this environment, but structurally speaking you know that.
Those tend to be where the end market slow I would say cyclicality wouldn't impact the kind of long term.
<unk> expectations of end market participation. So.
The ACI business does have a little bit more cyclicality.
Then most of our other businesses it tends to have a weaker Q3 than Q4.
And that's just because of the you know the upgrade cycle.
Nichols and investment cycles associated with some of the end markets in which a participation generally speaking that business performs relatively well and we had guided when we acquired the business, but it was certainly participating in that high single digit type of end market.
Arguably in this environment like kind of low double digit.
And the overall motion segment itself tends to be a higher growth area as well, so it's kind of a lower double digit.
It's just we have to just be realistic here that the overall portfolio here is one of diversification in where we would try to do is diversify out the risk elements and volatility in cyclical changes in macroeconomic differences between businesses and whatnot. So.
Drive that sustained organic growth overall, but we don't we run the business very much like a portfolio manager would run their portfolio.
Stocks, we do the very similar things in how we invest in our end markets and our application areas in our business units to drive a more sustained organic growth profile for the company.
Yeah, and I think just to add to that it's important to repeat what the end market exposure really is because then you can kind of get a gas for four yeah. How good we feel about this obviously very strong exposure to automation and robotics surgical robotics increasing exposure.
Also with the ATI acquisition electric vehicle production, which is going through a super cycle.
E U V lithography, which is a.
The semiconductor market, but which is also go through a super cycle.
The warehouse and logistics automation in general This segment also has.
The highest semiconductor exposure. So you can kind of expect as a result, a little bit more volatility from that were within that market. We are estate geared more towards.
Yeah, the less cyclical parts of all of the semiconductor market for example, UV. So many of these applications. We feel are still very early in their adoption cycle and yeah. So we feel good about the long term growth potential in that segment for that reason.
And what about regionally.
Yeah.
For that segment combined is there any.
Is there any greater influence of China exposure, maybe either direct or indirect.
Oh, that's a good question I think.
There is an element of that as a little bit more China exposure than some of our other segments.
We've never broken that out but it is fair to say that that's if there is a little bit more China exposure there yeah. Many other just a.
Reminder, is that yeah. When we played out regional sales. It is shipped two locations. So in other words, we could ship to a German OEM, who then ships to China right. So.
And so you got to be a little bit cautious about correlated one to one what truly is the end market exposure.
Okay. Okay. That's helpful.
Maybe just one last one any update.
On the legislation around the smoke evacuation insufflator.
Anything we should be on the lookout for to the fall.
Yeah listen I think also there gradually various continued adoption all state legislation of smoke evacuation in the U S as well as abroad. So I think that trend overall is very positive.
I think the.
The additional trend that is positive is outside through legislation per se is is how to integrate smoke evacuation as part of the workflow. So we feel we have a very strong solution there and that is.
Basically confirmed by a very strong pool of multiple major customers. So we we we see as a result that product category of ours.
And driving strong adoption in the coming years, which was.
No confirmed by design wins that we had last year.
Also see the opportunity and we see convergence between SKT laparoscopy and robotic surgeries, so that smoke evacuation will play a stronger role there as well.
So we see multiple growth drivers both.
From a legislation perspective product category as well as the adoption of new.
Patients.
Okay. Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Mittal with Costco for any closing remarks.
Thank you operator, so to summarize the event that delivered very impressive results in the second quarter of 2022, we saw double digit growth for sales bookings adjusted EBITDA adjusted EPS and we hit a new record high backlog.
We achieved all of this while managing supply chain disruptions rising costs and a more and shorten.
Macro environment, we're excited to see the continued strength of need vast industrial sector a sector and also in the medical sector event is very well positioned in these sectors with diversified exposure to long term secular macro trends in robotics, and automation precision medicine, and minimally invasive surgery and industry corridor, though.
In closing as always I would like to thank our customers our employees and our shareholders for their ongoing support I continue to be especially grateful for their dedicated efforts of all our great and event our employees.
We work so hard every day to tackle each new challenge. We appreciate your interest in the company and your participation in today's call.
Look forward to joining all of you in several months on our third quarter 2022 earnings call. Thank you very much. This call is now adjourned.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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