Q3 2022 Novanta Inc Earnings Call

And now I'd like to turn conference over to Ray Nash Corporate Finance leader for Nevada. Please go ahead.

Thank you very much good morning, and welcome to the Vantiv third quarter 2022 earnings Conference call I'm Ray Nash corporate Finance leader of Nevada with me on today's call is our chairman and Chief Executive Officer, Matthias classroom, and our Chief Financial Officer, Robert Buckley.

If you've 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 <unk> 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 that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website. After this call.

I'm now pleased to introduce the chair and Chief Executive Officer of Nevada, Matthias cluster. Thank.

Thank you Ray and good morning, everybody and thanks for joining our call <unk> achieved record results in the third quarter of 2022, we delivered another quarter of terrific financial performance with double digit growth in revenue and adjusted EBITDA as well as select growth for adjusted EPS.

We ended the quarter with our backlog still at near record level as we continue to see strong demand from our customers in the medical and advanced industrial markets we serve.

In the third quarter, we delivered a new record high of $223 million in revenue, representing 25% year over year revenue growth on a reported basis and 21% growth on an organic basis and up 4% on a sequential basis in.

In addition, our operating profit in the third quarter was fantastic with adjusted EBITDA of $49 million up 22% year over year and adjusted diluting earnings per share of <unk> 81 up 8% versus tougher comps in the prior year.

The excellent year to date financial year to date financial performance means we will once again raise our full year 2022 financial guidance, which Robert will cover in detail in a few minutes.

We are extremely pleased with our company's performance and the resilience of our portfolio in an ever changing and challenging macro environment.

<unk> 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 feel good about our strategy and we're staying focused on where we play and how we win.

We continue to build and grow quality businesses with proprietary IP and attractive secular growth markets with a vibrant culture and great talents.

And I continue to be very proud of our teams around the world who are using the Nevada gross system to drive exceptional operating performance no matter the environment.

Now, let's turn to what we're seeing in our markets and our customer activity. We continue to see strong ongoing demand from our customers in many application areas.

We ended the quarter was still near record backlog of $626 million.

At the same time and as indicated in our last call. We have started to see a return to more normalized ordering behavior from our customers. This was expected after a period of record orders and a seven consecutive quarters of positive book to Bill, which resulted in a cumulative book to bill of approximately 1.3 over that time.

We're also seeing some easing of supply chain shortages in this gradual improvement of delivery lead times is consistent with a normalizing of customer order patterns.

While our year to date book to Bill is well above one at $1 12, the third quarter book to Bill normalized whose airborne nine one in the quarter for an event that overall.

In the third quarter, our shows through advanced industrial markets for 33% growth year over year in factors and grow sequentially in the quarter. We continued to see strong sales performance in automation and robotics markets driven by continued underlying demand for factory automation battery and electric vehicle production extreme UV lithography.

<unk> overall adoption of automation, enabling technologies.

We believe that the penetration of robotic and automation applications are still relatively low.

With adoption, increasing due to multiple drivers such as increased productivity higher robot utility.

Onshoring and labor shortages.

In the quarter, we did start to see a rapid downturn in the microelectronics markets, which is now being widely reported on by other companies only approximately 10% of November sales are in this area and we delivered terrific operating results in the third quarter. Despite the impact of this downturn.

Although it is clear that overall industrial output is decelerating or close most major economies. It matters, where you play no ventas portfolio is geared towards secular growth trends in our sales so far have been nicely resilient.

And to see strong pull through from our OEM customers to fulfill our backlog to them as they continue to sell through to their end markets.

Turning to our medical end markets for the third quarter of 2022 sales to medical applications grew 19% versus the third quarter of 2021 and 6% sequentially.

During the quarter, we saw very strong orders and shipments to many of our medical OEM customers with noteworthy strengths and surgical robotics DNA sequencing of minimally invasive surgery equipment and consumables.

He's got a grease all saw strong double digit growth in sales year over year. It was positive to see further growth in our minimally invasive surgery product categories, which is tracking with the broader gradual improvement in elective surgical procedures.

While demand signals demonstrate that this market continues to accelerate heading into 2023. It is important to recognize that hospitals are still battling staff shortages to some extent.

Therefore, some near term volatility in order range should be expected.

Our longer term outlook, though on the minimally invasive surgery market remains bullish, particularly with our unique product offering of integrated smoke evacuation Insufflator and Ocean next generation endoscopic pumps.

From a regional perspective, we saw strong demand across all major geographies in the third quarter sales in Europe grew 15% in sales in the United States grew 36% year over year, we experienced 9% year over year revenue growth in China help our ATI acquisition, which saw strong electric vehicle production of robotics.

Demand.

Our China revenue, excluding acquisitions was down double digit year over year, which reflects the microelectronics downturn I spoke to earlier as we have several large customers in microelectronics, who are based in China. As a reminder, our China revenue was relatively low percentage of total no vent a revenue.

Now, let me touch on some of event, our strategic growth metrics for the third quarter, our vitality index, which is the revenue from new products launched in the last four years continues to be healthy at about 25% of sales was year over year MPI revenue revenues up high single digits versus the last year.

Our R&D teams continue to make good progress on our new product pipeline, which remains very healthy and we continue to invest in R&D in order to capture the many and mid and longer term opportunities with differentiated offerings Shanghai high growth markets.

Moving on in the third quarter design wins for the overall company increased more than 20% versus the prior year, we saw solid design wins and the majority of our businesses, including another exciting win in a minimally invasive surgery business.

We're excited about the platforms, we are winning in attractive high growth applications, such as minimally invasive surgery surgical robotics laser additive manufacturing micro machining.

Extreme UV and electric vehicle battery welding.

Now I would like to spend a moment on our minimally invasive surgery business, which is part of our vision segment in the last few years, we have secured a leading position in insufflator and pump technology through design wins and development agreements with multiple minimally evasive.

And robotic surgery, Oems, who have platforms, which we expect to launch in the next two years.

We're gaining share in our smoke evacuation Insufflator Indian does the endoscopy market, while also expanding and robotic surgery.

In addition, we're successfully expanding into arthroscopy with our proprietary pump technology.

As indicated in our prior calls these business wins are why we have stepped up our R&D investments in the MS business based on the business want to date, we expect the incremental business opportunity to be approximately $50 million revenue in 2025 with consumables picking an exponentially after that we.

We believe that the penetration rate of these technologies is still relatively low women with an attractive long term growth trajectory with November content steadily increasing in these attractive applications.

Based on the anticipated growth in our gross margin expectations for this business, we expect to significantly expand our medical consumables manufacturing capacity and capability.

In a lower cost region.

To that extent I'm pleased to announce that in the third quarter, we closest small but important acquisition called M. P H medical devices.

Is this a single site medical consumables manufacturing company located in the Czech Republic, which will be integrated into our <unk> business.

N P H manufacturers' medical consumable tube set products very similar to the products that are ready get sold alongside her insufflator and industrial pumps in the mis business.

This new FDA registered factory offers us a lower cost option with well trained talent available talent and a state of the art facility to manufacture more of our proprietary medical consumable products in the house, improving our margin profile and creating creating much needed capacity expansion as we.

Ramp up volumes over the next few years.

The near term sales contribution for decide is negligible, but will grow rapidly in the coming years.

We are thrilled to welcome the <unk> employees to be part of the new Vantiv family and we are excited for the way. This new site will help us achieve our long term strategic goals for gross margin expansion and sales growth.

Next I'd like to give you a brief update on event this utter acquisition and integration activities, our ATI and I M. S businesses have now passed their first anniversary of being part of November both businesses saw strong performance, where sales and bookings in the third quarter.

We are extremely happy with the contribution of these businesses and their strategic fit with me at this point a large portion of the integration activities have been successfully completed.

We're now focused on capitalizing on the mid and longer term opportunities. These businesses have brought to us.

As for the rest of our M&A activities acquisitions continue to be the primary focus for the Ventas capital deployment.

We're continuing to work on an active pipeline of opportunities and we'll share updates as we make progress on new opportunities.

So in summary, we feel terrific about our third quarter results and we continue to see strengths in the remainder of the year. We believe an event as long term strategic positioning is extremely strong.

We will continue 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.

With that I will turn the call over to Robert to provide more details on our operations and financial performance Robert.

Thank you <unk> and good morning, everyone. Our third quarter non-GAAP. Adjusted gross profit was 101 7 million or 46% adjusted gross margin compared to $80 3 million or 45% adjusted gross margin in the third quarter of 2021.

For the quarter adjusted gross margins were up year over year and close to flat sequentially. We continue to have good success counteracting the high inflationary pressure pressures.

Which further demonstrates the resiliency and overall strength of our business. In addition, we also continued to make strong progress and institutionalizing, the Nevada gross system across our factories and in our commercial channels. The deployment of kaizen in central tools particular around standard work problem solving value stream mapping.

The 80 20 principle are taking root and explains our ability to continue to deliver strong financial results. Despite the macroeconomic environment.

Third quarter R&D expenses were about $21 3 million or roughly 10% of sales third quarter SG&A expenses were $40 3 million or 18% of sales.

Overall operating expenses were roughly flat sequentially, which is slightly better than expected due to the timing of new hires which were later in the quarter than expected and project spending delays operating expenses on a percent of sales also improved with the better than expected revenue performance.

Adjusted EBITDA was approximately $49 million in the third quarter of 2022, a 22% adjusted EBITDA margin or.

Our adjusted EBITDA performance beat our expectations and our previously issued guidance due to higher than expected revenue timing of the new hires and the associated project spend.

On the tax front, our non-GAAP tax rate for the third quarter of 2022 with 19%. This differed from the statutory rate due to jurisdictional mix of income.

Our non-GAAP adjusted earnings per share were <unk> 81 cents in the quarter compared to 75 cents in the third quarter of last year, an increase of 8% year over year.

While adjusted operating income and adjusted EBITDA grew more than 20% year over year EPS was impacted by higher interest expense and a higher tax rate.

Third quarter operating cash flow was approximately $15 million, which is up versus the prior year, but lower than our expectations.

Third quarter cash flow continued to be impacted by higher inventory purchases, we've made to mitigate some of the supply chain disruptions as well as higher accounts receivables due to strong sales performance and larger than normal shipments since September which was the final month of the quarter.

And to a lesser extent cash flow was negatively impacted by roughly $3 million of higher cash taxes related to the change in the U S tax law.

We ended the quarter with gross debt of $448 million and our gross leverage ratio was less than two and a half times, our net debt was $363 million.

I'll now turn to update our performance on the operating segments first I'll start with the Photonics segment for the third quarter of 2022. This segment saw revenue growth of 28% year over year. This segment continues to experience strong customer demand and their advanced industrial applications and medical applications.

The Bill in this segment was one in the third quarter. We are very pleased with this outcome, especially considering this business experienced a significant fire as primary P. C. P. A vendor in Indonesia. It was able to recover quickly benefiting our customers and our shareholders our supply chain and manufacturing teams demonstrated extraordinary.

Larry resiliency to deliver these strong results.

Within photonics, new product revenue stayed strong at greater than 20% of sales in the third quarter design wins were up double digit year over year as our sales can you teams continue to win excellent new customer.

Platforms in.

In attractive high growth medical industrial applications.

The Photonics segment adjusted gross margin was approximately 50%, which was up nearly 300 basis points year over year in line with our expectations and our prior guidance.

The team continues to make terrific progress ramping our new production facility mitigating the cost and shortages of our primary P. C. P. A vendor in Indonesia, who at the fire and embracing that prevent the gross system disciplines.

Turning to our vision segment. This segment predominantly serves the medical end market and it's all reported revenue growth of 12% year over year, which was better than our expectations.

Growth in this segment was driven by strengthening in elective surgical procedures and continued success with our smoke evacuation Insufflator technology.

Well, our jadeite business line continues to show year over year declines due solely to supply chain shortages. These shortages and therefore, the revenue declines continue to moderate as supply from our vendor continues to increase and we are able to deliver to our customers.

The vision segment saw a book to Bill just under one as customers started to decrease their ordering in line with our reduced lead times. The vitality index. In this segment remain greater than 30% of sales and design win activity. In this segment increased strong double digits year over year, driven by another strong win in the minimally invasive surgery business.

Finally, turning to precision motion segments. This segment experienced 38% year over year revenue growth in the quarter, excluding acquisitions precision motion grew 2% year over year.

Our Selim motion and ATI business lines experienced 6% organic growth in the quarter. However, the segment's overall growth was impacted by a significant downturn in the China based P. C. P. A electronics market, which has served through our Westwood product line.

This product line fell nearly 40% in the quarter is expected to stay depressed for a few quarters.

As a reminder, the largest share of Novartis remaining exposure to microelectronics is in this segment.

The overall book to Bill ratio in this segment was 0.78, which was also largely driven by the Westwood and product line <unk>.

Excluding this business the book to Bill was closer to 0.9 on a year to date basis. The book to Bill ratio. In this segment was 0.98 and excluding the Westwood product line. The book to Bill was 1.04 on a year to date basis.

Precision motion M. P. I revenue was 18% of total sales in this segment, including ATI and IMS MTI sales grew 22% year over year.

Adjusted gross margins for this segment came in about 49%, which was down year over year, but in line with our expectations and was the result of margin dilution from the decline in the Westwood and product line.

Turning now to guidance overall, we expect the fourth quarter to start to return to a more typical industry and business dynamic and ordering pattern.

Way from the pandemic fuel recovery.

In the near term this could mean further slowing in some microelectronics applications and some industrial capital applications. How offer we also expect our medical applications to continue to strength in helping to offset the headwind in those applications.

Microelectronics applications, which represent approximately 10% of our sales with declined to 9% of sales in the fourth quarter or nearly 20% reduction sequentially, whereas medical applications, which represent approximately 48% of our sales to your date.

We will represent 50% of sales in the fourth quarter.

Despite these dynamics, our customer demand and business performance has been resilient and we continue to expect to exit 2022 with near record backlog and accelerating demand trends in the medical markets.

Our strong financial performance in the third quarter means our full year 2022 guidance will be raised.

So starting with the revenue guidance for the fourth quarter of 'twenty 'twenty. Two we stand here today, we expect GAAP revenue in the range of $215 million and $217 million, which represents revenue growth in the range of 7% to 9% year over year.

For the full year of 2022, we now expect GAAP revenue in the range of 857 million to $859 million, which implies revenue growth of 21% to 22% year over year representing.

Approximately 12% organic growth for the full year of 2022.

On a segment level in the fourth quarter, we expect the photonics segment to grow revenue in that 25% to 30% range year over year customer demand remains solid in this segment with growth in a number of industrial and medical applications Division.

The vision segment is expected to demonstrate revenue growth in the range of 8% to 10% year over year, while we continue to see strong demand from the medical end markets electronic part shortages are prime merrily cause of the range and the revenue.

Finally, our precision motion segment is expected to be down 8% to 10% year over year due solely to a year over year decline in our Westwood product line, which will fall more than 60% of revenue in the fourth quarter, excluding the Westland product line, our Celaire motion at ATI business lines are expected to grow in the mid.

Single digit year over year basis.

Moving on to overall Nevada's gross margin, we expect gross margins in the fourth quarter to be greater than 46%, which is expected to lock our 46% gross margin target for the full year of 2022.

Gross margins by segment are expected to see similar dynamics that we experienced in the third quarter, finishing.

Finishing off the year and then adjusted gross margin of approximately 46% represents a nearly 100 basis points of expansion year over year.

And as an excellent accomplishment given the difficult dynamics, we've had to manage throughout the year.

Thanks to our progress with the Nevada to grow system across our business units, we feel confident we're on a path to continuous and sustained gross margin expansion this year and the next.

Turning to R&D and SG&A expenses.

Which were 62 million in the third quarter. They are now expected to be approximately 63 million to $64 million in the fourth quarter.

We continue to invest in R&D because of our confidence in the near term customer applications. We are pursuing and the expected launch cycles of customers New products. We are particularly excited about the new Insufflator words, which are effectively solidifying our value proposition of an integrated smoke evacuation insufflator technology in the medical Mark.

<unk>.

Depreciation expense was $3 million in the third quarter and should be similar in the fourth quarter stock compensation expense, which was <unk> 6 billion in the third quarter will be just over $5 million in the fourth quarter.

For adjusted EBITDA for the fourth quarter of 2022, we expect a range of 45 to 46 billion for the full year. We now expect adjusted EBITDA in the range of 183 million to $184 million higher than previously issued guidance.

Interest expense, which was 4 million in the third quarter would be approximately $5 5 million in the fourth quarter, driven by rising interest rates and a slightly higher debt balance.

We expect our non-GAAP tax rate to be around 18% in the fourth quarter absent significant changes in jurisdictional mix of income and other variability of our eligible tax benefits.

Diluted weighted average shares outstanding will be approximately 36 million shares for adjusted diluted earnings per share. We expect a range of 70 to 74 in the fourth quarter.

And for the full year, we now expect adjusted diluted earnings per share to be between $3 <unk> and $3. Six finally, we expect operating cash flows to improve sequentially in the fourth quarter versus third quarter as we stabilize our inventory levels and drive a more linear production process and therefore shipments in the quarter.

Resulting in a lower accounts receivable balance.

As always this guidance does not assume any significant changes to foreign exchange rates. However, it is worth noting that the currency markets have continued to be historically volatile in the past few months and this has had an impact on our third quarter results, including a nearly eight point negative impact on our reported revenue growth.

In summary, Novartis performance in the third quarter of 2022 was excellent.

We had our highest level of quarterly sales, we saw double digit growth in sales and adjusted EBITDA, along with solid growth in adjusted earnings per share.

Our teams continue to execute extremely well, helping the company manage through the difficult supply chain challenges, while still winning new customer platforms and progressing our innovation pipeline.

We continue to see below market attrition rates and are seeing great success at attracting top talent and.

And we continue to deliver strong financial results with a very solid full year outlook, despite significant macroeconomic challenges in the marketplace.

We look forward to continuing to deliver on our commitments to our employees our customers and our shareholders. This concludes the prepared remarks, we'll now open the call up for questions.

Youre using a speakerphone please pick up your handset before pressing the he's to withdraw your question. Please press Star then two.

From an ordering pattern or behavior.

And so that results in some volatility that could be expected.

Sequentially also on the capital and actually some of the volatility is also related to our Oems not finding all the right components right. So there is going to be some timing effect there, but if you look back that immediately we feel very good about 2023 also on the capital side.

Is is all of that being used relatively quickly or is there. Some restock that has to take place of consumables coming out of the pandemic.

Is that a y into surgical procedure rates I think surgical procedure rates, which have historically been somewhere around 6% are definitely growing at a higher rate right now and so there is a little bit of a combination of both but this is something we expect to hold relatively steady.

Yeah. So.

Theyre, making certain products today that.

Production lines qualified production lines, and then start to ramp these production lines towards the latter part of 2023.

Embedded in your Q4 revenue guidance, what's the headwind from currency, but youre assuming.

The same that we experienced in the third quarter.

Okay, so that 70% range okay.

So that's good.

Thank you and once again. Please press Star then one if you would like to ask a question.

Kind of building on that last question just to be clear what was embedded in the <unk> guidance for organic revenue growth.

Overall.

Go to I think it was a 7% to 9%.

Acquisitions of.

Schneider Nate ATI.

We have already so that that's not going away is there acquisition revenue in the.

But I would say that.

And you're right, we lap IMS and <unk>. So that you won't have that revenue growth anymore.

And then.

I can go about getting you to make some comments on 2023.

Without upsetting yet, but I'm gonna trend I think in the I think in the <unk>.

The acceleration I think even use the word acceleration in procedure volume or what was the comment you made about.

That market, Yeah, I think what we're seeing right now is as microelectronics, which will represent about 9% of our sales in the fourth quarter is decelerating.

Yeah at a double digit rate, but the medical on the medical side, we see acceleration. So we're seeing double digit type of growth in some of the medical consumables that we have right now and even some of the capital equipment. While there is some volatility expected. There overall, that's that's an area that continues to strengthen as we get into 2023.

The Big question is the effects of the rest of the industrial piece of the portfolio and then how does that all pulled out I would just say that.

As we look out to 'twenty, three we expect microelectronics to be weak and we expect the medical markets more than offset that.

The engine are are appropriately balanced.

The expectation is that the medical markets collectively for Ya would grow in 2023 just to state. It seems that's correct yes.

Yes, that's correct okay.

Your backlog you're going in.

One last one on 2023 so.

The one business and.

Yes.

You know your commentary is directionally accurate. It's a we did this facility serves two purposes of one it allows us to.

Facilities and capacities ourselves. So we can get all the volume out that were expected in Italian spoke about.

How the Windsor and Mris drive about $50 million worth of incremental revenue in 2025, well now we've solidified that Ed this.

Qualified to menu manufacturing these medical consumables are obviously FDA registered products.

And so we expect you know roughly this time at the end of next year that that facility be fully qualified and then will be driving the margin expansion thereafter.

Okay. So the margin expansion associated with that is really more to come in 'twenty 'twenty four before it's fully realized is that fair yeah.

Material margin improvement or material volumes until you get to 2024.

Got it Okay, Alright, I'll save my other question's related thank you.

All right Brian Thank you. Thank.

Thank you and the next question comes from Andrew Buscaglia with Aaron Berg.

So in the precision motion segment, you got it down 8% to 10% in Q4.

Q4, I guess, how does that how do I know.

From baseline can start to grow that out.

Yeah. So what I said was that the overall segment is expected to be down 8% to 10% in the fourth quarter and that is being driven by our Westwood product lines at Westland product line itself is down 60%.

The Westland product line serves the China PCB drilling market and so it is by definition of microelectronics based application.

So if you exclude the west Wynn product line this delay our motion in the ATI businesses.

Are expected to grow mid single digit year over year.

In the fourth quarter, and I don't see any of that kind of changing as we as we get out further from here. So I think those are growth businesses and they are expected to stay in a growth category.

Versus any other period and I think most likely as you get into 2023 and look more similar to the dynamics of the third quarter.

Okay.

Okay and then.

Overall youre talking about.

The next year or two but well micro electronics be as a percentage of total sales. When you finished the year with the expectation built into the guide.

Yeah, 9% of sales.

But nine down double digits, and then 50 roughly mad at us medical in that.

Correct Okay.

About that.

<unk> been spending on R&D to capture that minimally invasive surgery opportunity and you talk.

Correct me, if I'm wrong, you talked about $50 million incremental revenue through 2025.

Okay.

So I'll answer part of the question all the time. It's also later rubbing, but I would say that we've been floating around 10%.

Sales for the last two years I don't see that dynamic changing in 2023 or 2024.

So I still expect us to make some shifts there because I think theres plenty of opportunity to make investments even as we are.

Even as those programs fall off now I will say you know, we're driving $50 billion worth of Victor metal sales from those programs, but they don't all kick in at once with the same exact loan cycles and so there will be continued spend associated with that in order to fully commercialize them.

And we just we just factor in a number of $50 million incremental business in 2025 and of course that will.

Continued to grow afterwards, both on the capital side as well as on the consumables side, so sort of.

So it varies between 75 million and 2030, there is gonna be sure to sustained growth.

That we're super excited about.

Okay. Okay got it thank you.

Thank you and then last question comes from Rob Mason with Baird.

Good morning.

Good morning.

Joined the call late so apologies.

This is redundant information, but did you explain why.

Oh, sorry, sorry.

Sorry, I didn't hear you kind of difficult to hear so I didn't hear it right away you said the vision gross margins and why they came down.

But down sequentially.

The reason for that and what you're expecting for the fourth quarter there.

Yes.

It's difficult to hear you, but I would say that in the fourth quarter I expect gross margins the vision segment that tick up a little bit so.

So in each of the individual segments in the fourth quarter gross margins will tick up a little bit from their third quarter level.

I would say that it was largely driven just by a little bit of a change in mix.

And so even though that's actually that same dynamic that's happening in the fourth quarter R. J that business will not deteriorate in the fourth quarter and so that that has a favorable mix shift for us which helps to improve the margin profile.

Okay. Okay.

And then maybe just last question. If there are any semiconductor micro week, Oh here to speak of in the chronic segment that we should also be aware of.

In terms of.

Getting saw softer I know, there's some semiconductor exposure there I think it's newer newer content newer wins.

Trend line on the business.

C B a type of via haul type applications and that market actually went down in 2021, and so it hasn't actually been a big contributor in the 2022 calendar period.

And so we don't expect the same level of impact overall microelectronics is going to be about 9% of sales and in.

I would say almost all of that exposure is really sitting in our at our precision motion segment at this point.

The other point, Rob I want to make is that yes, our content in extreme UV lithography is steadily increasing and it's public knowledge that that application is is growing double digit actually against the micro electronics strength. So.

Even within that 9% of sales and increasing amount of revenue over time will be in that kind of faster as secular growth trajectory.

Thank you.

Thank you operator, so to summarize no event that delivered very impressive results in the third quarter of 2022, we saw a record level sales and profitability double digit growth for sales and adjusted EBITDA.

And we maintain a near record high backlog, we've achieved all of this while managing a challenging macro environment.

We're excited to see the continued strength in the medical sector and also the resume Sydney advanced industrial sector event that is very well positioned in these sectors and with diversified exposure to a long term macro trends in.

Robotics, and automation precision medicine, minimally invasive surgery and industry photo, though in closing as always I would like to thank our customers our employees and our shareholders for.

For ongoing support I continued to be especially grateful for their dedicated efforts of or prevent the employees who work. So hard every day to tackle each new challenge. We appreciate your interest in the company and your participation in today's call and look forward to joining all of you in several months on our fourth quarter and full year 2020.

Two earnings call. Thank you very much this call is now adjourned.

Thank you as mentioned the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Yeah.