Q4 2022 Novanta Inc Earnings Call
Speaker 2: At this time, I would like to welcome everyone to the Event Uncorporated 2022 4th quarter and 4 year earnings call. All lines have been placed on mute to prevent any background noise.
Speaker 2: After the speaker's remarks, there will be a question and answer session. To ask a question, you may press the star then one on your touch-down phone. To throw your question, please press star then two. Please note, this event is being recorded.
Speaker 3: I now would like to turn the conference over to Ray Nash, corporate finance leader for Nevada. Please go ahead. Thank you very much. Good morning. Welcome to Novanta's fourth quarter in full year 2022. Ernie's conference call. I'm Ray Nash, corporate finance leader of Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthias Glastra, and our Chief Financial Officer, Robert Buckley. If you have not received a copy of our Ernie's press release issued today, you may obtain it from the Investor Relations section of our website at www.novantage.com. Thank you very much.
Speaker 3: materially from our current expectations. If any poor looking statements made today represent our views only as of this time we disclaim any obligation to update for looking statements in the future even if our estimates change. So you should not rely on any of these poor looking statements as representing our views as of anytime after this call. During this call we will be referring to certain non-GAAP financial measures, a reconciliation of such non-GAAP financial measures.
Speaker 3: to the most directly comparable GAAP measures is available as an attachment to our Erniez Press release. To the extent that we use non- GAAP financial measures during this call that are not reconciled to GAAP measures in the Erniez 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 Novanta, Matthias Kostre. Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered record results in 2022 for the full year of achieved all time highs for sales, adjusted EBITDA, and adjusted EPS with each showing strong double digit growth over a prior year results.
Speaker 3: We continue to see strong demand for our customers in the medical and advanced industrial markets we serve, and our teams are delivering great results. In the fourth quarter, we deliver 218 million dollars in revenue, representing 10% year-over-year revenue growth on a reported basis, and 14% growth on an organic basis.
Speaker 3: Our operating profit in the fourth quarter was also strong with adjusted EBITDA of $46 million and adjusted the alluded earnings per share of 75 cents. For the full year we delivered $861 million in revenue representing 22% year-over-year revenue growth on a reported basis.
Speaker 3: and 14% growth on an organic basis. Adjusted EBITDA for the full year was $144 million, up more than 20% versus 2021, and adjusted EPS of $3.07 up 17%. I'm incredibly proud of how our team exceeded our financial objectives and progressed our strategic initiatives driving strong, operating performance in an evolving and micro-economic environment. Ednauventa, our mission is to deliver innovation that matters. We serve as a trusted school force.
Speaker 3: We feel that the strength of our portfolio and business model, combined with our winning growth strategy, focused on where we play and how we win, drives our 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.
Speaker 3: And we ended the quarter with a near record backlog of $612 million. As expected, and as discussed in our last earnings score, we are seeing and return to more normalized ordering behavior from our customers. Our book to bill in the fourth quarter was 0.91. And our book to bill for the full year was 1.07. As we see further easing of supply chain shortages and gradual improvement of delivery at least times, our customers are normalizing to order veterans and returning to a lower level of backlog coverage. This normalization is expected and healthy after the record orders we received is through at 2021 and 2022.
Speaker 3: In the fourth quarter, sales to medical sales continued to accelerate, growing 19%, versus the fourth quarter of 2021, making approximately 53% of total muvanta sales. During the quarter, we saw very strong orders and shipments to many of our medical OEM customers, with noteworthy strength in minimally invasive surgery equipment and consumables, in vitro diagnostics, embassioned monitoring equipment, and DNA sequencing. These categories also strong double digit growth in sales year over year. It was positive to see further growth in our minimally invasive surgery, but our categories.
Speaker 3: which are tracking with the broader gradual improvement in elective surgical procedures and reduction in hospital labor shortages. For the full year, a sales through medical markets grew by 16 percent and made up approximately 49 percent of total Maventa sales. Turning to advanced industrial markets, our sales and recorder, excluding microelectronics applications were up 9 percent year over year.
Speaker 3: and made up approximately 38% of total November sales. 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, and increased overall adoption of automation and labeling technologies. We believe that the penetration of robotic and automation applications is still relatively low.
Speaker 3: With adoption increasing due to multiple drivers such as increased productivity, higher robot utility, unsurrying and labor shortages. For the full year, our sales to advance industry markets, excluding microelectronics applications, grew by 41% and made up approximately 39% of total and event as sales.
Speaker 3: Looking at just our microelectronics markets, which represent just 9% of sales in the fourth quarter, these include products that are designed into waver-fab, semi-conductor waver-fab equipment, semi-conductor packaging equipment, PCBA, VLV drilling equipment, and other equipment used to produce electronics.
Speaker 3: In the quarter, we continue to see double digit declines from the cyclical downturn in this market, which we reported on in our prior earnings call. Consisted with last quarter, the largest decline manifested in our technology offerings for the PCBA field-reling equipment market. From a regional perspective, in the fourth quarter, sales in Europe grew 4%, despite the Russian tire-control service, which are running large pain surgery permit against the yellow internal film pack.
Speaker 3: Ukraine, conflict and associated inflationary and market economic challenges displaced on the region. In addition, sales to North America grew 31% year over year. China, which represented about 10% of overall sales, declined 39% year over year, which was predominantly caused by the decline in market electronic revenue. For the full year, the regional dynamics were similar, with double digit growth in Europe and the United States and roughly flat growth for China. Now, let me touch on some of Novantos strategic growth metrics. For the fourth quarter and full year, our Vatality Index, which is the revenue from new products launched in the last four years.
Speaker 3: could be healthy at about 25% of sales with year-over-year NPR revenue up low double digits versus last year, driven by new product revenue and DNA sequencing, smoke evacuation insufflators and detection and detection and analysis for in vitro diagnostics.
Speaker 3: Our R&D teams continue to make good progress on our new product pipeline, which remains very healthy. With particular focus on robotic surgery, precision robotics, minimally invasive surgery, deep and extreme UV, electric vehicle production, and battery processing, laser-editive manufacturing and micro-machining. For example,
Speaker 3: Yesterday, we officially launched the Denali-Serva-Drive and our precision motion segment. Serva-Drive are the brains in intelligent motion control and Denali represents the tireless efforts and unwavering dedication of our amazing team. The Denali-Serva-Drive is a small-a-server-drive designed specifically for service robots in medical and non-medical spaces which help us to enter into this attractive adjacency for an event. We continue to invest in R&D in order to capture the many, many, and long-term opportunities with different shaded offerings in high-growth markets. Moving on to designments for the full year of 2022, we experience the expected
Speaker 3: evacuation insufflators and pumps.
Speaker 3: with products expected to begin selling in 2024. We continue to demonstrate strong traction with an over-the-new products outside MIS, focused on attractive high-gross applications, such as laser additive manufacturing, micro-machining, extreme UV and electric vehicle battery welding. Next, I'd like to give you a brief update on Maventos Exposition Integration Activities. Our integration of MPH medical devices is on track. I visited the site two weeks ago and was very pleased.
Speaker 3: This remains our primary focus, so an events are skeptical deployment. If you feel good that we have a strong pipeline of opportunities despite the higher interest rate environment.
Speaker 3: Now I'd like to share a few comments on how we continue to evolve the culture of an event and the health of our organization and our people.
Speaker 3: We continue to invest in our culture called the Noventa way. We believe the Noventa way has been a differentiator in attracting, retaining and developing core talent. We continue to see below market labor attrition rates, both among our leadership ranks as well as across all company employees. We're focusing on a few factors to retain our employees, competitive pay, a great company culture, and career development and progression.
Speaker 3: In 2022, we strengthened our leadership team with the addition of Chakra Veto, group president of our Enabling Automation Enabling Technology segment, which represents our photonics and precision motion segments. And we added our first general counsel, Michelle Welsh. We have progressed the deployment of the Naventagross system with hundreds of Navent employees trained on and using the tools. We have a regular cadence of guys and events, structured problem solving sessions, and other process improvement activities at all levels of the organization to fundamentally improve our operating results. These include reduction cycle and lead times, improving our supply chain and planning processes to enhance delivery performance to our customers.
Speaker 3: accelerating material and labor productivity and improving time to market over new product launches. We also have strengths in our noventory culture, improving our employee engagement scores, gaining great traction with our diversity, equity and inclusion efforts, and investing more in leadership development initiatives. In 2022, we stood up three employee resource groups.
Speaker 3: and have expanded our community efforts which we feel have improved engagement, inclusion, and a sense of belonging at that in Oventa.
Speaker 3: Sustainability also remains an important topic for an event. As a global organization with a right-reaching customer and supplier days, our products touch lives up and down the value chain. We have the opportunity and responsibility to not only deliver mission critical innovation, but do so in a way that positively impacts the environment, our communities and the economy. Most of our sites are now ISO 14,000 and 1 certified, and under the leadership of our sustainability board, we have been able to have one account of what a community is having to deliver this important vehicle. We have been able to have one account of what a community is having to deliver this important vehicle.
Speaker 3: great progress in deploying the NVGRO system and continued success at further establishing a thriving company culture.
Speaker 3: We believe no ventos long-term strategic position is extremely strong. We continue to broaden our exposure to medical and advanced industrial applications that have long-term secular growth trends such as robotics and automation, healthcare productivity, and precision medicine. In 2020...
Speaker 3: three, we see strong tailwinds in our medical businesses, which will help to offset headwinds in our microelectronics markets. And we will continue to focus on new product development, designwinds and high growth applications, driving cash flows, and institutionalizing the nose antagro system. So with that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert, thank you, Matthias, and good morning, everyone.
Speaker 4: Our fourth quarter non-GAP adjusted gross profit was 97.9 million or 45% adjusted gross margin compared to 88.3 million or a 44% adjusted gross margin in the fourth quarter of 2021. For the full year non-GAP adjusted gross profit was 392 million or 45.6% adjusted gross margin compared to 319 million or a 45% margin in 2021. For the quarter adjusted gross margins were up Eurov.
Speaker 4: is that our photonics and precision motion segments.
Speaker 4: The second dynamic was that our anticipated uptick in revenue margin in our photonics and precision motion segments was interrupted by a regional outbreak of COVID in China. This outbreak not only resulted in us shuttering our factory for December and January , but it also broadly impacted supplier deliveries of electronic parts for our products.
Speaker 4: as well as our customers ability to take receipt of our shipments. On the bright side, the China situation is now resolved, and therefore we expect to be back on our trajectory for the long-term gross margin expansion as we head into 2023.
Speaker 4: Overall, growth margins were still relatively healthy in the fourth quarter, given the inflationary pressures and the COVID disruptions. We continue to have good success, counteracting the inflationary pressures of raw materials, labor, and even overhead costs, such as energy, which demonstrated the overall strength of our technologies, our culture, and our business model.
Speaker 4: We also continue to make strong progress in institutionalizing the November growth system across our factories in commercial channels and with our engineering teams. Our NGS common tools will help ensure our ongoing margin expansion allowing us to continue to deliver strong financial results despite the macroeconomic environment. Moving on fourth quarter R&D expenses were $22 million or roughly 10%
Speaker 4: expenses of a percent of sales for roughly flat, sequentially in the quarter, and flat year over year for the full year, as we continue to carefully manage our spending in line with the company growth and margin expansion.
Speaker 4: A Justin EBITDA was approximately 46 million in the fourth quarter of 2022 or 21% of Justin EBITDA margin. For the full year, Justin EBITDA was approximately 184 million in 2022, compared to 153 million in 2021, representing growth of more than 20% year-over-year. On the tax front, our non-gap tax reading, the fourth quarter of 2022.
Speaker 4: on-gap adjusted earnings per share was 75 cents in the quarter compared to 67 cents to the fourth quarter of 2021, an increase of 12% year-over-year. But the full year on non-gap adjusted earnings per share was $3.07 compared to $2.62 in 2021, an increase of 17% year-over-year.
Speaker 4: While just an operating income and adjusted EBITDAG were more than 20% year-over-year for the full year, EPS growth was impacted by higher interest expense and a higher tax rate. We expect that dynamic to continue into 2023, which I'll cover when I share the guidance
Speaker 4: Fourth quarter operating cash flow was $41 million, which is up 41% versus the prior year. Fourth quarter cash flow improves sequentially as our teams began to level off further inventory purchases and also do the strong collections and slightly better shipment for orders that we Win the Armed Forces 900 minutes over the fall???
Speaker 4: For the full year of 2022, operating cash flow was approximately $91 million. This was despite cash flow being negatively impacted by approximately $11 million from higher cash taxes due to the change in U.S. tax law related to the amortization of R&D
Speaker 4: We ended the quarter with gross data 440 million. Our gross leverage was 2.4 times. However, our net debt was 340 million, putting the company in a great position to fund further acquisitions.
Speaker 4: I now turn to update the performance of the operating segment. First I'll start with the photonics segment. For the fourth quarter of 2022, the segments saw a revenue growth of 27% year over year. This segment continues to experience very strong customer demand in their advanced industrial applications, traditional medical applications, and DNA sequencing. We are very pleased with the outcome and these teams continue to fight through persistence, supply chains, disruptions, 300 100 100 really second warning, and one trusted comfortable.
Speaker 4: which created challenges to manage our factory output efficiently. Our supply chain and manufacturing teams demonstrated extraordinary resilience to deliver these strong results. The book to bill in this segment was 0.8 in the fourth quarter. As mentioned previously, we are seeing customers reduce their order rate to better align with the actual and perceived drop in lead times and significant past due deliveries from Novanta.
Speaker 4: Yet we also continue to see resilient demand signals from our customers. As many of them still regularly stock out of parts and hold no meaningful safety stocks. The book to bill for the full year of 2022 was 1.14 and that strength in order to leave us in a very favorable backlog coverage position for 2023.
Speaker 4: Within photonics, new product revenue states strong at greater than 20% of sales in the fourth quarter, and total new products grew more than 30% year-over-year. Design wins for the full year, or a high single digit year-over-year, as our sales team continues to win excellent new business and attractive high growth medical and industrial applications, overcoming difficult year-over-year comps. The photonics.
Speaker 4: Segment, adjusted gross margin, was nearly 50%, which was up 400 basis points year-to-year. Turning to our vision segment, the segment predominates, serves the medical end markets, and saw a reported revenue of 17% year-to-year, which is better than our expectations. Growth in this segment was driven by strength and elective surgical procedures and continued success in our Smoke Evacuation Ensoflator Technologies.
Speaker 4: In addition, our JANEC business line returned to solid growth in the quarter, as the prior challenges with the supplier have now been resolved.
Speaker 4: The vision segments saw a book to bill of just under one in the fourth quarter as customers continue to gradually decrease their ordering in line with our reducing lead times, but at the same time this business is experiencing further strengthening in the end markets.
Speaker 4: For the full year, the book to bill for this segment was 1.09. The vitality index in this segment remained greater than 30% of sales. Design win activity in this segment declined in the fourth quarter year over year solely because the business faced very difficult comparisons from the record-breaking design in progress. The book to bill for this segment was 1.09.
Speaker 4: from our Smoke Evacuation Products in 2021 and early 2022.
Speaker 4: Design Win activity for the full year was down double-dissim. But as mentioned in our last call, the cumulative impact of design wins in this segment and specifically our MIS business line is going to generate 50 million of revenue in 2025. With further growth after that.
Speaker 4: So this segment will continue to be a large driver of organic growth for the overall company for the next several years Finally turning to our precision motion segment this segment experience a revenue decline of nearly 10% year-to-year in the quarter This was in line with our expectations and our prior guidance
Speaker 4: The decline was due solely to a steep year-over-year decline in our microelectronics applications, most pronounced in our PCBA via hole drilling applications, which fell more than 60%. Excluding this decline, the remainder of this segment grew mid-single digits in the quarter.
Speaker 4: Despite the significant drop in demand in the microelectronics space, the overall put the bill ratio in this segment was .96, which improves sequentially. On the full-year basis, the book the bill ratio in this segment was .98. New product revenue was greater than the 15% of total sales for both the quarter and the full year. However, this ratio now includes product sales from our ATI business line, which has a lower proportion of new product revenue rates in the overall segment.
Speaker 4: As we mentioned, when we acquired the business, we are investing in innovation to accelerate their new product development and offerings and to accelerate their design wins with customers. We are making great progress here, adding a new engineering leadership talent into the corner. We believe we are on a good trajectory to bring this business on par with our existing business lines.
Speaker 4: Because of the new addition of ATI, the Euroyear growth of MPI sales of this segment is not meaningful since 2022. This is the first full year of ATI. Adjust the growth margin of the segment came in at 48.5%, which was down slightly year-or-year and flat sequentially. So turning the guidance.
Speaker 4: We expect our book to build and continue to moderate and remain below one for the first half of the year as customers reduce their ordering in line with both actual and perceived lead times for Novantas products and to lower their level of backlog coverage particularly given Novantas past due deliveries. In the first quarter we expect some near-term volatility in bookings caused by our annual price increase initiative.
Speaker 4: However, this is expected to normalize after the first quarter. Overall, we have not seen any double ordering of Novata products, nor any customer cancellations materialize. The strength of our backlog is a reflection of our innovations and the applications in which we participate.
Speaker 4: Over the course of 2023, we expect to reduce our backlog in an orderly fashion, with overall backlog coverage normalizing closer to 45 to 50% range versus the high 60% coverage we saw in 2022.
Speaker 4: Regardless, we are entering 2023 with strong backlog coverage for the first few quarters, helping to reduce any macroeconomic volatility. We expect demand in our medical and markets to remain strong all year, driven by elective surgical procedures and to some extent new products and introductions, particularly in the DNA sequencing market.
Speaker 4: We expect solid growth coming from both our medical capital equipment and our medical consumable sales. Revenue growth in these applications is largely limited by production capacity in 2023, both with our medical consumables production and our DNA sequencing technologies.
Speaker 4: We are taking actions to resolve this, including investing in capital expenditures in 2023 to ramp up our new check-based medical manufacturing facility and investing in a new Manchester United Kingdom manufacturing facility.
Speaker 4: Both facilities are progressing nicely and we expect to fully overcome the capacity constraints in early 2024.
Speaker 4: Turning to our advanced industrial end markets, we expect traditional industrial end markets to see resilient strength and continue to grow in 2023, particularly in the robotics and automation space, laser-based material processing applications, industrial metrology, and laser-based 3D printing markets.
Speaker 4: While demand in this market is expected to moderate somewhat in line with the overall industrial spending environment, our focus on secular growth applications and new product introductions should allow our business to experience growth in our niche application areas.
Speaker 4: In our microelectronics and markets, we expect double digit declines in the PCBA via whole drilling applications and semiconductor wafer fab applications which will drive a 200-300 basis point revenue headwind for Novando versus 2022.
Speaker 4: Our overall microelectronics exposure will decline to 7% to 8% of overall sales over the course of the year.
Speaker 4: This compares to 12% of sales for the full year of 2022 and 9% of sales in the fourth quarter. As we look out beyond 2023, we expect our exposure to be more, to be more cyclical applications within microelectronics to be further muted.
Speaker 4: We are deepening our content and exposure to the secular growth, deep and extreme UV lithography applications, and we expect this application area to represent the bulk of our microelectronics revenue in 2024 and beyond.
Speaker 4: So starting with revenue guidance, our first quarter of 2023, as we stand here today, we expect gap revenue in the range of 210 million to 212 million, which represent revenue growth in the mid-signal district territory year over year. For the full year of 2023, we expect gap revenue in the range of 890 million to 915 million, which also applies mid-signal district revenue growth year over year.
Speaker 4: The range in our full year is really a factor of how industrial capital spending reacts to changes in interest rate environment and the pull-through effects that has on sales to our OEM customers. Arriving rate environment will likely result in software industrials demand, whereas a decrease in rates can act as a catalyst for an uptick in capital spending. The range in our full year is really a factor of how industrial capital spending reacts to an uptick in capital spending.
Speaker 4: On the segment level in the first quarter, we expect photonic segments grow revenue into 10 to 12% range year over year. Customer demand remains resilient in this segment and with continued growth in multiple industrial medical applications. On the full year, revenue in this segment is expected to be up mid-single digit. Demand in this segment continues to be robust across a multitude of application areas, including DNA sequencing and other medical applications.
Speaker 4: market, tied to the PCBA via Hull Drilling Application areas in the back end, semiconductor applications, and some China related disruptions caused by the December and January regional COVID outbreak. These specific applications are expected to be down nearly 70% of the quarter.
Speaker 4: partially offset by growth in industrial robotics, medical robotics, and traditional industrial markets. Similar to the photonics segment, demand in our core and targeted applications remain strong. On the full-year basis, revenue segments likely to be flat down, low single digits caused by the aforementioned dynamics. Finally, a vision that...
Speaker 4: segment is expected to demonstrate revenue growth in the range of 10% to 15% in the first quarter year over year. On a sequential basis, this segment sees some seasonality in orders and shipments with our larger medical OEMs, which is generally tied to hospital CAPEX expenditure budget. We continue to see
Speaker 4: strong demand from the medical and markets driven by a return of elective surgical procedures globally. On the full year basis, revenue growth is expected to be in the high single digit to low double digit territory depending on the supply chain challenges in our production capacity.
Speaker 4: So effectively, we are not limited by end market demand at this time. Moving on to the overall Novantus adjusted gross margin. We expect gross margins in the first quarter to be approximately 45.5%, which is up sequentially from the fourth quarter. The photonics.
Speaker 4: segment gross margins are expected to be flat sequentially, whereas the vision, the precision motion segments are expected to be up sequentially. Gross margins in the first quarter are expected to see continued pressure from disruptions in China due to the regional COVID outbreak in December and January , which is now resolved, and continued electronic part shortages. As the year progresses, we expect these headwinds will be reduced.
Speaker 4: and further risk are mitigated to our pricing initiative and the acceleration of the Vance de Groce system initiatives. As a consequence for the full year of 2023, we now expect that just the gross margin is between 46.4% and 47%. Representing between 80 and 140 basis points of margin expansion year over year.
Speaker 4: During the R&D and SGA expenses, they expected me approximately 61 million to 62 million in the first quarter. For the full year, we expect a range of 258 million and 263 million.
Speaker 4: The increase in cost year of year is driven by labor cost increases tied to our annual cycle investments in innovation Particularly significant investments in our vision segment tied to aforementioned Product launches around smoke evacuation and subplader technologies and some further investments in our commercial
Speaker 4: Appreciation expense will be approximately 4 million in the first quarter and 17 million for the full year Stock compensation expense will be approximately 6 million in the first quarter and 23 million for the full year The adjusted EBITDA on the first quarter will be a range of 44 to 45 million in the first quarter
Speaker 4: and for the full year 2023 we expect adjusted EBITDA on the range of $195 million and $207 million or an EBITDA margin of roughly 22 percent. Interest expense which was nearly $6 million in the fourth quarter and nearly $16 million for the full year 2022.
Speaker 4: is expected to be slightly above 6 million in the first quarter of 2023, and is expected to be a range of approximately 24 million to 26 million in the full year of 2023, driven by the rise in interest rates.
Speaker 4: Our guidance assumes a weighted average interest rate of approximately 6% for the full year. In the near term, we will focus on paying down debt to mitigate the impact of rising rates, and this is one factor that drives the range of our full year EPS guidance. However, as Matthias mentioned, we also expect to be heavily focused on our acquisition strategy.
Speaker 4: Therefore, how our interest expense unfolds will largely be contingent on our acquisition deal flow in the year and the geographical availability of cash flows. We expect our non-GAAP tax rate to be around 18% for the first quarter as well as for the full year, 2023. The rise in the tax rate from 16.5 to 18 is driven by the rise in corporate income tax rates in the United Kingdom.
Speaker 4: and our expectations around jurisdictional mix of income. We are also monitoring the new OECD pillar two tax law changes which is tied to member nations hopes to conform to an international tax framework that imposes a minimum tax rate of 15 globally for corporations.
Speaker 4: The implications of this are still being investigated by us and therefore any immediate tax law changes are not factored into our rate expectations. Deluted weighted average shares outstanding will be approximately 36 million shares. For adjusted the diluted range per share, we expect a range of 64 cents to 66 cents in the first quarter and $3 to $3.20.
Speaker 4: and seasonal tax payments. However, we expect cash loads strengthened at the year progresses despite the increase in capital spending for the aforementioned capacity expansions, putting us in a great position to accelerate our acquisition strategy. As always, this guy does not assume any significant changes in foreign exchange rates.
Speaker 4: In summary, Novance's performance in the fourth quarter of 2022 and the full year was above our expectations and a testament to the resiliency of the portfolio. We had our highest ever level of sales with double digit reporting growth and organic growth for the full year. We saw double digit and adjusted even as well as adjusted the earnings per share.
Speaker 4: Our teams continue to deliver great results, helping the company work through difficult supply chain disruptions and inflationary pressures, while still winning new customer platforms and progressing our innovation pipeline. We continue to see below market labor attrition rates and we're seeing great success at attracting top talent.
Speaker 4: Despite a more uncertain macroeconomic environment, the rising interest rate environment, we expect to continue to deliver strong financial results in 2023 and see our growth remaining strong well past this year. We remain very grateful for the outstanding performance of our employees and their tireless efforts to help us be successful in this dynamic environment.
Speaker 2: We look forward to continuing to deliver on our commitments and our employees to our customers and to our shareholders. This concludes the prepared remarks. We'll now open the call for questions. Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch to your phone.
Speaker 2: If you are using a speaker phone, please pick up your hands up before pressing the case. To throw your question, please rest in charge of this. At this time, we'll pause momentarily to assemble the roster. And this morning's first question comes from Leed Girgato with CJS Securities.
Speaker 2: Hi, good morning. Morning, Lee. To just starting with the vision segment, Robert, can you speak to sort of your expectation of the mix of products within the vision segment, meaning MIS versus the rest of the stuff for both Q1 and for the full year and how that might impact your margin guidance there? Thank you.
Speaker 4: I'm expecting solid growth out of the JADAC business. There will be margin, if you're trying to get that gross margin expansion in the vision segment, I think the overall gross margin will improve in the vision segment on a year-over-year basis. So there will be continued growth coming out of the JADAC business, which is serving.
Speaker 2: below corporate average on both the consumables and the hardware piece. As you look out to late 24 and into 25 when you start to see that 50 million of incremental revenue ramp on the new smoke evacuation product lines.
Speaker 2: How did those margins compare to both the current MIS margins and then the segment average margins within vision?
Speaker 4: Yes one thing can me clarify. So when we get very strong growth than a medical consumables piece of the portfolio, that's the piece that's been driving the lowest gross margin and therefore that's the headwind that we see. That's why we bought the mph site in the Czech Republic and why we're ramping it.
Speaker 4: The actual capital equipment piece of the product offering is a much more attractive growth margin profile. What we go about launching our new Smoke Evacuation Technologies, those products both on the considerable side as well as the capital equipment side improve growth margins.
Speaker 4: And so we're intending to launch those products at a much higher gross margin. And then you compound that with the fact that the facility in the Czech Republic will be running product through it beginning in 2024. And so the combination of those two events will allow the gross margin expansion for the overall company.
Speaker 4: which gives us that confidence of why margins will expand from, let's say, 47% this year to something closer to 50% over the next two years.
Speaker 2: Dr., and just to be, is there any quantifiable impact from the facility coming online impacting the margins in either the first half of the year or all of 2023?
Speaker 4: It did impact a little bit in the fourth quarter, and it's impacting a little bit in the first quarter, but it begins to get more and more muted as we progress over the course of the year. It wouldn't kind of get in the qualification of it, but certainly when you see the...
Speaker 4: 38.9% gross margins of fourth quarter. An element of that was the MPH acquisition impacting that segment. Not all of it was the medical consumables, but it's all, you know, we tied that together into a single vote.
Speaker 4: So I think that headwind will eliminate by the end of the first quarter. It's largely on the basis that they had some sales were running off. So as we get into the back half of the year, even Q2, you know that becomes a non-issue from our gross margin story. Got it. Okay. I'll hop back into you and let others have something.
Speaker 3: Thanks thanks late.
Speaker 5: Thank you, and then ask a question, Concentre Brian Dread with William Blair.
Speaker 6: Thanks, just to follow up on that one. So MTH just so understand the timing. That's volume of the the warm consumables is ramping throughout 2023 and then.
Speaker 4: you'll reach like the full run rate volume in 2024. Is that how to think about it? No, there's some so MPH of will the facility in the Czech Republic I should say will not have any revenue coming out of it associated with our medical consumables in 2023 at least not until the fourth quarter.
Speaker 4: That is product that's all being qualified and ramped in the facility, but it won't be used for.
Speaker 4: product that's all being qualified and ramped in the facility, but it won't be used for for sale purposes.
Speaker 4: The negative growth margin had went into the fourth quarter and the first quarter is if you remember we bought a business with revenue And so we're bleeding off of that revenue discontinuing those products and so there's some last time buys That impacted the fourth quarter will impact the first quarter a little bit from a mixed profile perspective But that goes away by the time we get into the second and third quarter and so it won't no longer be
Speaker 4: no longer be an issue. By the time we get to the fourth quarter, ramping up production of our own medical consumables and so and the margin profile what we ramp out of there will be better than what we've been shipping out of the Louvre side facility. It won't be meaningful in the fourth quarter but it'll be it'll begin to get very significant in 2024.
Speaker 6: Okay, got it. So your gross margin benefit from this move of bringing the consumables in house is going to be, it's going to show up in the financial statements in 2024, right? Perdana, yes. Yep. And so you will see gross margin expansion in the vision segment.
Speaker 6: In 2023, that's largely coming from continued growth in our J-DAC business and solid growth coming from the capital equipment portion of the business. Got it. How do you expect your backlog and the book to build ratios to track throughout this year sequentially as we move through the year?
Speaker 4: We are seeing a little bit of that correction, let's say, in reducing lead times. There's two elements of lead times is what our lead times actually are and then what I would take the customers are forecasting and perceiving them to be and I think there's a healthy
Speaker 4: the tension between those two numbers. So as we get into the first quarter, the even, sorry, the book to bill will be below one again. I expect the same in Q2. And then I'll begin to moderate by the time we get to Q3, and probably return to a one in Q4. That's how we built our forecast right now. You know, things can change, because the vision segment is obviously continuing to grow.
Speaker 3: That's what we typically do over the course of the last few years. But we feel like there's some good, positive tailwinds associated with the applications in which we're participating in. Yeah, I'm Brian to add, this is Matias. I mean, just recall that our backlog coverage for the next, let's say, 12 months, exiting the year was a...
Speaker 3: stated in this prepared remarks like to 45 to 50% right that normally kind of if you do the math means that that orders will be more muted because customers has placed you know substantial orders on us and there's no need to add more to it right so that's really the majority of the dynamic
Speaker 3: And then of course the only area where you see an end user demand impact is in the kind of or smallest segment which is the demycra electronic site which we commonly don't. But the rest is old normalization related. Yeah. Yeah. Makes great sense. Yeah. Thank you. Yeah.
Speaker 5: Thank you. And once again, please press star and then one if you would like to ask a question.
Speaker 5: All right, the next question comes from Joseph Donahue with Baird. Hey, guys. I'm on for Rob today. How are you doing? Good morning. Good morning. Just to touch on the microelectronics, do you have line of sight on that bottoming out? Should we be thinking first half 23 and then…
Speaker 4: and we keep it that way for the full year. There are some signals pointing at the second half, you know, that could perhaps be stronger, we're not baking that into our forecast at this time. And the reason why is just, you know, wait and see and see how that manifests. But so that's in the guidance range where I say that the overall microelectronics exposure to the company will drop something.
down to some day around 7% to 8% of sales, probably 7% of sales, versus to 12% of sales that we had in 2022. So it's basically presuming it bottoms in Q1 and we keep at that level all throughout the year.
Now the mix shift changes pretty dramatically. So what you look at is inside the components of that is that the really cyclical pieces of that portfolio come down and are completely muted, really kind of starting the first quarter and they're onwards. And what's remaining is actually exposure into DBUV based applications, lithography based applications, which have basical
a fairly long secular tailwind associated with them. So we feel good aware that product is currently positioned what we have remaining. And that's the area that we continue to take market share in. That's the area that we continue to have design win progress in. And that's the area that we would expect that as we exit 2023, it will actually become a growth story.
And so the microelectronics piece of the portfolio will be a less technical piece on a go forward basis after this year and a higher growth characteristic to it. Got it. Thank you. And then just on the issues that you had with the factory in China, are you able to quantify the impact of the first quarter guidance on the the production process should meet in poll stone.
the fact that we had to shut down the factory in December and in January . There was also applications that our customers had disruptions and some vendors had disruptions, right? So there was a couple dynamics taking place there from just the rapid outbreak of COVID and the burnout of the pandemic. So the implications of that really was the gross margins. So maybe half of it was...
there tend to be in the precision motion and in the photonics.
portion of the portfolio. So I would say that, you know, those that leads to a weaker gross margin in the first quarter in those two segments. But then as you look into the later quarters in Q2, 3 and 4, at least for the photonic segment, the gross margins will expand and that overall for the full year that segment will see an expansion in gross margins.
Okay, got it. Thanks so much.
Thank you. And this concludes the question and answer session. Now I would like to return the floor to Matthias Glaustroff for any closing comments.
Thank you operators. So to summarize, Naventa had a record setting year in 2022. We saw our highest level of sales on profitability, double digit growth for sales, adjusted EBITDA and adjusted DPS. We entered 2023 with a very robust level backlog as Trump
and gross margin expansion in one of our strategic product categories. We've achieved all of this while managing and challenging environment. We're excited to see the continued growth in the medical sector and also the resumes in the advanced industrial sector.
In fact, as well position indie sectors with a versatile exposure to long-term secular micro trends in robotics automation, precision medicine, minimally evasive surgery, and industry 4.0.
In 2023 and beyond, we will continue to focus on new product development, design wins in high growth applications, driving cash flows, and institutionalizing the Novanta growth system.
In closing, as always, I would like to thank our customers, our employees and our shareholders for their own goals and support and continue to be especially grateful for all the dedicated efforts of our November teammates who work diligently every day to tackle new opportunities and manage through new challenges. We appreciate your interest in the company.
in your participation in today's call. I look forward to joining all of you in several months on our first quarter, 2023 earnings call. Thank you very much, this call's now adjourned.
Thank you. The conference has now concluded. Thank you for attending today's presentation. I mean, I'll listen to your lines.