Q2 2023 Novanta Inc Earnings Call
Good morning, My name is Andrea and I will be your conference operator today.
At this time I would like to welcome everyone to the Sofia anti incorporate its 2023 second quarter earnings call.
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After the Speakers' remarks, there will be a question and answer session.
To ask a question you May press Star then one on you touched on phone.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I'd 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 2023 earnings Conference call.
I am Ray Nash corporate finance leader of Nevada with me on today's call is our chair and Chief Executive Officer, Tightest cluster, and our Chief Financial Officer, Robert Buckley.
If you have not received a copy of our earnings press release issued today you may obtain it from the Investor Relations section of our website at Www Dot no banter dotcom.
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, The tightest cluster. Thank.
Thank you Ray good morning, everybody and thanks for joining our call November had a fantastic second quarter inter quarter, we delivered $229 million in revenue, representing 7% year over year revenue growth on a reported basis.
5% growth on an organic basis.
Our adjusted EBITDA was $52 million and adjusted diluted earnings per share was <unk> 80 cents. These.
These results were better than our expectations and reflect excellent operating performance by our teams in the evolving macroeconomic environment.
That's a business model with diversified exposure to high growth medical and advanced industrial markets has proven resilient under multiple geopolitical and macroeconomic scenarios, our proprietary products and technologies are well positioned in medical and advanced industrial applications with long term secular tailwind such as rubber.
Alex and automation health care productivity and precision medicine.
We feel that the strength and diversification of our portfolio and business model combined with our winning growth strategy focus on where we play and how we win drives our performance no matter the environment now.
Now, let's turn to what we're seeing in our markets and our customer activity. We continued to see strong ongoing demand from our customers in many application areas. Our teams made great progress with using our past due backlog to customers by more than 46% sequentially, while still maintaining a backlog of $583 million, which is.
Still very high by historical standards.
This past due reduction was better than expected and helped us to deliver stronger sales growth versus our expectations as we accelerated more shipments into the second quarter versus the third quarter.
Our book to Bill in the first quarter in the in the second quarter was 0.92, which is in line with our expectations.
As we discussed in the last earnings call. Our teams continued to reduce our lead times for our products back to historical averages and customer expectations and yet we continued to see strong demand from our customers representing represented by our strong backlog coverage for the remainder of the year.
In the second quarter. So some medical markets were very robust growing 20% versus the prior year and making up approximately 53% of total <unk> sales.
During the quarter, we saw very strong orders and shipments to many of our medical OEM customers with noteworthy strengths and minimally invasive surgery equipment and consumables.
Brito diagnostics and patient monitoring equipment, surgical robotics and DNA sequencing.
These categories all saw strong double digit growth in sales year over year, we're seeing structural growth in these applications based on underlying secular growth drivers such as patient surgical procedure growth rates.
And advancements in Biopharma technologies, including next generation DNA sequencing.
We continue to expect to see two wins in these end markets for the remainder of 2023 and in 2024.
Further supported by post pandemic patient backlogs and the new product launches and cycles of our customers and ourselves.
Turning to advanced industrial markets, our sales in the second quarter, excluding microelectronics applications were up 4% year over year and made up approximately 39% of total sales.
The slower growth was in line with our expectations and is the result of a tighter industrial capital spending macro environment.
In line with contracting PMI indices.
In addition in the quarter, we sold a start of a short term pause in industrial robotics spending manifesting mainly in China in countries with strong exports to China, such as Germany.
This has to be reported on elsewhere and as a result of some weakness in Chinese on China's economy, and the volatility and uncertainty in Chinese subsidies and stimulus as well as deferral of some China based projects around electric vehicles and battery production facilities.
November is seeing these impacts in our ATI business, which saw a year over year decrease in sales in the second quarter versus a very strong 2022.
This end market pauses and thoughtfully temporary is this the economic weakness in China as they made a long term secular growth drivers of robotics and automation remain intact, but as this but at this time. It is expected to continue for the duration of the year with a recovery happening in 2024.
Beyond industrial robotics in China, we continue to see resuming sales performance in many of our other industrial end markets, including multiple precision manufacturing applications.
Driven by increased overall adoption of automation, enabling technologies to address workforce shortages bid.
Business resiliency and to address production needs for certain makeup trends such as electric vehicles at Green energy investments.
Overall, our industrial exposure steadily geared towards markets with secular growth outlooks.
And just our microelectronics markets, which represented less than 8% of sales in the quarter. The dynamics are roughly the same as we said on our last call in the quarter, we saw a nearly 40% decline year over year from the cyclical downturn in this market, particularly driven by a P. C. P. A via hole drilling business, which is.
Now run rating and just a couple of million dollars of sales per quarter lower than previously expected.
We now estimate that the overall drop in microelectronics market will be a 300 to 400 basis point headwind on total November sales growth for the full year yeah.
Yet despite these macroeconomic headwinds no ventas diversified end market exposure shows the strength of our strategy and focus.
Enabling the business to show strong growth in the second quarter.
From a regional perspective in the second quarter shows the North America grew 24% year over year and sales in Europe declined by 6%.
Which reflects the market economic slowdown in this region is working through and its connections with the China market sales in China, which represented about 9% of overall sales declined 30% year over year, which was caused by the decline in Microcontrollers revenue industrial robotics pause and overall macroeconomic weakness in China.
Now these regional trends are expected to continue into third and fourth quarter with a recovery coming in 2024.
Now, let me touch on some of the strategic growth metrics for our design wins year to date, we have had an expected year over year decline, which is mainly timing related we had a tough year over year comparison from large design wins achieved in the first half of 2022 mainly in our minimally invasive surgery business.
As we've reported previously our mis business, one large new product platforms in early 2022 with both existing and new customers, which we expect will contribute significantly to our revenue growth in 2025 and beyond.
So despite the tough comparison for design wins, so far this year, we feel good about the absolute dollar wins in dollar terms and we expect to return to growth in design wins year over year as the year progresses.
Next our vitality index in the second quarter, what was that about mid teens percentage of sales, which is roughly the same as prior quarter and in line with our expectations. As a reminder, 2023 is a transition year for our vitality index.
With several top products going beyond their four year milestone this year.
This means they are no longer attracting the index, but they continue to contribute significantly to overall sales growth. We expect our vitality index to stay at roughly just mid teens low teens level for most of 2023.
But given that our R&D brightline is the strongest in a decade, we expect this index to rebound in 'twenty 'twenty four M. B are those re lounge and ramp multiple new product platforms.
This year and next year.
On that note in 2023 year to date, we're pleased to report that we've launched multiple exciting new products across our businesses and I will share a few highlights.
First in our precision medicine manufacturing segment, we recently launched the new Firefly three D skin have sub system, which has been specially designed for metal based laser additive manufacturing and the electric vehicle battery processing.
This product combines our highest performing digital galvano matters with our proprietary bereave optics technology to enable the levels of extreme speed accuracy and loader if needed in this demanding application areas next.
Next in our robotics and automation segment, we recently launched a new Denali serve a drive which is the smallest and most power dense overdrive in the world. This product sets new standards for safety and efficiency for sure. If a drive while also being incredibly called back in size, yet easy to integrate the Denali servo drive is designed for you.
User robotic joins lab automation equipment service robotics and haptic systems.
We also launched next generation forced or sensors for these same segments as well as robotic surgery.
One more highlight also in robotics and automation is our new series a tool change your product line. This end of arm technology as the latest generation of robotic tool changes, which are located in the rest of the robot.
And permit single robots to be designed for multiple tasks series eight is a great option for electric vehicle production lines due to diverse utility. It offers an attractive price points to the end user. These are just a few examples of leading edge products. We've introduced this year, we're proud of the efforts and innovations of our talented engineering teams.
And their ability to design products that help create productivity and value for our customers.
Moving on I am proud to see our how our teams are doubling down on the November gross system or a N. G. S. During the second quarter. We brought together 100 over leaders to about to meet them further accelerate N G S momentum results of.
Past due backlog reduction delivery and quality improvement improving time to market over new products gross margin expansion and cash flow conversions are all being driven number coming up and using the end, yes tools and processes.
Next I'd like to give you a brief update on my Panthers acquisition integration activities. We are approaching our first anniversary of our acquisition of M. P. H medical devices and the integration continues to progress ahead of our expectations.
Customer qualification of the side are well underway and the team continues to ramp up its capabilities to produce no ventas own proprietary medical consumable products at production volumes.
So great about the progress being made and feel we are on track to achieve our plans for both capacity expansion and margin expansion, which this side is enabling for our medical solutions segment.
In summary, we had a terrific second quarter and a great first half of the year, we had excellent sales growth driven by strong demand in medical end markets. We also delivered very healthy margin expansion and profit growth, which is based on great progress in deploying didn't event. The gross system a strong performance in the first half is helping us to balance some of the risks were now.
See in the second half of the year. So it does it gives us confidence to narrow the range of our full year guidance, which Robert will speak to in a moment.
We believe November as long term strategic positioning continues to be extremely strong and we're staying the course on executing our strategy and capital deployment model.
We see continued success in attracting and retaining top talent that further establishing a thriving company culture built for the long term.
With that I will turn the call over to Robert to provide more details on our operations and financial performance Robert Thank.
Thank you <unk> and good morning, everyone. Our second quarter non-GAAP adjusted gross profit was 108 billion or 47% adjusted gross margin compared to 99 million or 46% and adjusted gross margin in the second quarter of 2022 for the quarter adjusted gross margins were up sequentially and year over year by more than.
100 basis point.
This outcome was better than our expectations and represents strong execution by our teams to achieve this result, the longest driver the largest driver of our performance with better production quality achieved through the deployment of the NGF productivity tools in our factories, the 47% gross margin puts us on a solid track to achieving our full year.
Our goal of expanding gross margins by 100 basis points.
Moving on to operating expenses R&D expenses were roughly 23 million or approximately 10% of sales first quarter SG&A expenses were 42 million or roughly 18% of sales.
Overall operating expenses as a percent of sales were flat sequentially and flat year over year in the quarter.
Adjusted EBITDA was approximately $52 million in the second quarter of 2023 or 22, 5% adjusted EBITDA margin.
Is 45 billion in the prior year.
On the tax front, our non-GAAP tax rate for the second quarter of 2023 was 18% this different from the statutory rate due to jurisdictional mix of income.
Our non-GAAP adjusted earnings per share was 80 cents in the quarter compared to 78 cents in the second quarter of 2022, while adjusted EBITDA grew double digits E. P. S continued.
To be muted solely to the higher interest expense from the jump in worldwide interest rates.
Second quarter cash flow was approximately 23 million up 25% versus the prior year. We expect cash flows to continue to improve through the rest of the year as we gradually bring down our inventory to more historical levels and continues to drive good profitability.
We ended the quarter with gross debt of $413 million at our gross leverage ratio was two one times.
Our net debt was 321 million, putting the company in a great position to fund further acquisitions I'll now turn to an update for the performance of our operating segments first in the precision medicine and manufacturing segment. The second quarter of 2023 revenue grew 7% year over year. This segment continues to experience strong customer demand.
Medical applications.
Especially in uptick in next generation DNA sequencing the book to Bill in this segment was 8.84 in the second quarter, which reflects the normalization of lead times as customers adjusted their level of backlog coverage to pre pandemic levels as expected.
Within precision medicine, and manufacturing new product revenue stayed strong at greater than 20% of sales in the second quarter. Our sales team continues to win excellent new business and attracting high growth medical and industrial applications, winning new content, winning new customers and winning new applications.
<unk> wins in these segments in the quarter were down year over year, but this is really driven by timing and difficult comparisons, particularly around the 2022 wins in laser quantum branded products.
For the full year, we expect solid design win growth year over year.
The precision medicine and manufacturing segment adjusted gross margin was 51% in the quarter, which was up 500 basis points year over year. This is a great outcome and reflects the efforts and successes. This team is having a deployed in Nevada to grow system deep into the organization and overcoming some of the operational supply chain challenge.
As they experienced in the prior year.
Turning to robotics and automation segment. This segment experienced revenue decline of 11% year over year in the quarter. This was in line with our expectations and prior guidance. The decline continues to be mainly driven by a steep year over year decline in microelectronics applications particular, or PCB mechanical via hole drilling applications.
Its declined over 70%.
And now at an immaterial level sales for the company.
This decline in PCB drilling is causing a sales growth headwind for the overall, Nevada of approximately 300 to 400 basis points for the full year, which is slightly worse than we'd previously previously estimated.
In addition, as the tightest batch in this segment are starting to see an impact from a short term pause in the sales of industrial robotics caused by weak macro conditions in China, which is currently the largest market in the world for industrial Robotics. This downturn is more pronounced in the third and fourth quarters and reflected in the guidance.
For the second half.
Overall book to Bill ratio in this cycle was 0.80 again driven by the microelectronics decline in exposure microelectronics experienced a negligible level of bookings in the quarter.
New product revenue was roughly 10% of total sales for the segment in the quarter.
As a reminder, this ratio is lower than 2022 because its metric now includes new product sales from our ATI business line, which has low new products in its revenue and therefore, it is having a dampening effect on the overall segment ratio. However is the tightest spoke too earlier this.
Quarter ATI launched two new products the series a tool changer and next generation forced torque sensors, both of which position us to capture new growth opportunities in medical robotics and industrial robotic markets.
Adjusted gross margin for the robotics and automation segment came in at about 51%, which was roughly flat year over year and up sequentially by 300 basis points again, we're proud of the progress our teams are making by adopting the Nevada gross system to drive strong margin performance.
To accomplish gross margin expansion considering the sharp declines in microelectronics is truly a testament to Ngls.
Finally, our medical solutions segment.
<unk> reported revenue growth of 27% year over year, which was stronger than our expectations growth. In this segment continues to be driven by strength in elective surgical procedures as well as R. J that business line, where the business continues to perform well now that supply chain challenges have been mitigated.
The medical solutions segment saw a book to Bill of 1.09 in the second quarter with bookings up 13% sequentially and 5% year over year further, indicating the building demand we are seeing in this end market.
The vitality in this segment reduced versus the prior year as we mentioned our last call. This is largely driven by our first generation smoke evacuation insufflator products, reaching their four year milestones and so we are no longer tracking it as part of our official vitality index. As a result of this segment has the vitality index in the mid teens year to date.
It was in line with our expectations. We expect this metric to stay at this level for 2023, but the increase thereafter, as we launched our second generation smoke evacuation Insufflator and endoscopic pumps in 2024, and then 2025 design win activity in this segment grew single digits in the second quarter.
Year over year on the strength of some exciting design wins that are integrated operating room technology products.
Overall, our business units performed at or above our expectations and are performing in a manner that helps to mitigate the volatility seen in industrial capital spending microelectronics and macroeconomic conditions, particularly in China.
Our strategy of using multiple business units and multiple application areas focused on secular growth trends has diversified out significant volatility, allowing us to continue to deliver solid results in the challenging environment.
Turning now to guidance as <unk> mentioned, we continue to see ordering behavior from our customers returning to historical patterns as our product lead times drop we are seeing a steady improvement in lead times everywhere in the portfolio and in some cases are currently times are already matching historical levels. This will result in a book to bill ratio.
To be below one in the back half of the year as discussed in our prior calls from.
From an end market perspective, we expect demand in our medical end markets to remain strong and we see solid growth coming from both our medical capital equipment or a medical consumable sales as well as our IBD and other life science customers year over year growth in the second half of the year will slow mainly due to the accelerated past due backlog reduction that have.
And in the second quarter and more difficult comparisons in the second half of the year. However, we continue to see strong customer activities and medical end markets, particularly around new product launches across our portfolio. These projects remain on track and as a consequence, our sales funnel looks stronger for 'twenty 'twenty four and beyond.
In our advanced industrial end market, we expect the downturn in microelectronics and a pause in industrial robotics due to the China economic environment. The last through the remainder of the year for China in July we've seen a sharp decrease in manufacturing production as measured by the PMI index within the company sharp decline in export orders, which is leading it.
To further weakening of demand in the second half.
Microelectronics sales are expected to fall to approximately 7% of revenue by year end, resulting in a 300 to 400 basis point headwind for the full year sales.
And sales to China are expected to fall to approximately 8% of revenue by year end.
However, we expect the remainder of our industrial applications to be resilient in the back half of the year and we continue to have solid backlog coverage in these areas.
We continue to see robotics, and automation investments, particularly in the U S and Europe being made to support business resiliency mitigate labor shortages and support investments in Green energy and electric vehicles. We also continue to expect our disciplined focus on secular growth applications, a broader focus on medical market and our effort to accelerate.
New product introductions to allowed Nevada, the weather and more uncertain macroeconomic environment.
Based on this environment, we're narrowing the full year guidance, which we provided back in March.
In addition to providing an update to our third quarter expectations.
Starting with revenue guidance for the third quarter of 2023 as we stand here today, we expect GAAP revenue in the range of $221 billion to $224 million, which represent reported revenue growth roughly flat on a year over year basis.
Excluded the impact of microelectronics end market, our revenue growth in the third quarter would be approximately 4% year over year.
The third quarter will sequentially down for the second quarter in part due to the accelerated shipments we made in the second quarter helped bring down our past due backlog and better satisfy our customers and in part by a pause in industrial robotics than they get in China, which is expected to recover in 2024.
At the segment level in the third quarter, we expect precision medicine and manufacturing segment to grow revenue in the 6% to 8% range on a year over year basis customer demand remains resilient in this segment and we continue growth in multiple medical and industrial applications, including DNA sequencing micro machining and laser based material.
Assessing our robotics and automation segment is expected to be down sequentially high single digits and down approximately 15% year over year the year over year decline is driven by the downturn in the microelectronics market and the positive industrial robotics spending in China due to the local dynamics there.
Finally, our medical solutions segment is expected to demonstrate year over year revenue growth in the range of 8% to 10% in the third quarter. While we are seeing more difficult comparisons growth in our applications remained strong and building. Thanks to the expected new product launches scheduled for 2024.
For the full year 2023, we expect GAAP revenue in the range of 892 to 902 billion. This would represent mid single digit reported growth for the full year. This reflects our ongoing strength in medical markets moderation and some industrial end markets.
But offset by weakness in microelectronics as well as as well as in China in the second half of the year.
Moving on to overall divert those gross margin, we expect gross margin in the third quarter to be approximately $46 five to 47, five which is up year over year.
It would be roughly flat sequentially.
<unk> Medicine and manufacturing segment gross margin is expected to increase moderately from the second quarter, whereas robotics automation and medical solutions segments are expected to be flat sequentially in.
The full year of 2023, we expect adjusted gross margins to be approximately 46, 5% to 47%. We believe our team's efforts to use the Nevada gross system will help us sustain and expand our gross margins as we head into the remainder of the year.
Turning to R&D and SG&A expenses, they are expected to be approximately 65 million to $66 million in the third quarter. The increase in costs year over year is driven by labor cost increases and further investments in innovation, particularly our investments in our medical solutions segment tied to the aforementioned.
Products.
Further investments in our commercial engine Dupree.
Depreciation expense, which was about $4 million in the second quarter will be the same in the third quarter stock compensation expense, which was just below $6 billion in the second quarter will be slightly above $6 million in the third quarter for adjusted EBITDA in the third quarter 2023, we expect a range of 48 million to 51 billion.
For the full year of 2023, the adjusted EBITDA, We expect a range of 196 million to $204 million. This reflects our confidence to still show strong profit performance and cost management, despite the macro economic conditions.
Interest expense, which was nearly $7 million in the second quarter is expected to be over $7 million in the third quarter of 2023, driven by the continued rise in interest rates, we continue to focus on paying down debt to mitigate the impact of rising rates, we expect our non-GAAP tax rate to be around 18% in the third quarter of 2023.
Similar to the second quarter and roughly the same as the prior year diluted weighted average shares outstanding will be approximately 36 million shares for adjusted diluted earnings per share. We expect a range of 70 to 77 in the third quarter for.
For the full year of 2023 adjusted diluted earnings per share. We now expect a range of 296 cents.
To 315 cents. This reflects our adjusted EBITDA outlook, but also an expectation of higher interest rates will continue through the end of the year.
Finally, we expect cash flow to impluse improves sequentially in the third quarter as we continue to focus our efforts on bringing down our inventory levels. In addition, we continue to invest in two significant manufacturing facility expansion projects, including our new Manchester UK optical subsystem manufacturing facility and a new checkbook.
Public medical consumable manufacturing facility. These investments are on track for the year and the business case for making these investments continues to strengthen.
As always the guidance does not assume any significant changes to foreign exchange rates.
In summary, Novartis performance in the second quarter of 2023 was excellent we'd beat our own expectations for sales growth margin expansion and profit performance, we saw tremendous growth in our medical end markets, which more than offset a known headwind in microelectronics. This dynamic is yet another testament to the diversification resiliency of our.
Our business portfolio. Our teams continued to deliver great results, helping the company worked through a difficult operating environment, while still winning new customer platforms and progressing our innovation pipeline. Despite a more challenging macroeconomic environment, particularly in China, and a higher interest rate environment, we are confident in our ability to deliver.
Ever our updated outlook for full year, 2023, and we see our sales growth prospects remaining strong well past this year and on the back of exciting new product launches. Starting later this year and our exposure to high growth end markets in both medical and advanced industrial applications.
We remain grateful for the outstanding performance of our employees and their tireless efforts to help us be successful in this dynamic environment, we look forward to continuing to deliver on our commitments and our employees our customers and our shareholders. This concludes the prepared remarks, we'll now open the call up for questions.
We will now begin the question and answer session.
Asked a question you May press star.
And then one on your Touchtone phone.
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To withdraw your question. Please press Star then two.
Our first question comes from Lee Jagoda.
C J F.
Please go ahead.
Hi, good morning.
Good morning Lee.
So.
You touched a lot on the declines we're seeing in microelectronics and and the idea that the P. C. B a stuff is now at a pretty low run rate can you comment on the remainder of the microelectronics business and the trends you're seeing.
Seeing there.
Yeah. So what is I would say the PCB a exposure has now declined to just a couple of million dollars at this point.
So really nothing and and has bottomed out at that level.
So what's remaining is is.
As products sold into the E V.
Deep UV markets and applications and for those areas, we're actually seeing a little bit of growth right now and as we've talked about in the last call.
We expect that will continue to grow into 'twenty 'twenty, four and maybe even in an accelerated basis because of additional business that we've been winning in that marketplace.
So the overall exposure in microelectronics as we go into 2024, and our view is now a little bit of a secular tailwind versus a dynamic of volatility that we're seeing in 2023.
Got it and then.
Some of some of them some of the companies that we follow here are commenting about weakness in the hospital procedure volumes.
Are you what are you seeing there and what are your OEM customers, telling you about their future volumes.
Yeah, we are our customers are very bullish and upbeat about the remainder of this year and next year. So basically on the back of.
You know improved procedure growth rates that are supported by still long patient backlogs right and then further helped by product cycles, and new product launches of our customers and of course for ourselves, we see new product launches coming in.
Intercourse of next year as well that will further strengthen that so we feel that there's areas is strong for us.
Again, we play in minimally invasive surgery robotic surgery.
In vitro diagnostics DNA sequencing does roll up strong double digits in the second quarter, and we expect them to remain strong in the second half of the year in 'twenty 2024.
All right and then one more for Robert and I'll hop back in queue, you mentioned, the Manchester in the Czech facilities as capital usage in 2020.
<unk> 23, what what's the Capex guidance for this year and then assuming that it goes back to a more normalized level in 'twenty four how do you think about that range.
Yeah. So we added it in the Q.
So it's $25 million to $30 million is the total capex that we're expecting this year.
As we get into next year that might be a little carryover that but it will start to drop then backed out I think overall capex as a percent of sales, we'd probably drop closer to the 2% level on a go forward basis.
2% of sales.
Great I'll hop back in queue.
Alright. Thanks.
Yeah.
Your next question comes from Brian Drab with William Blair. Please go ahead.
Hi, Good morning, Thanks for taking my question good morning, Brian .
Good morning, So I just wanted to clarify in microelectronics, you know I understand the Westwood business.
I I believe was about 2% of sales and then we talked about that I think it was in the fourth quarter, you know going to you know 1% it was basically cut in half.
So that to me it felt like 100 basis point headwind.
When you're talking about the 300 to 400 can you just bridge that you know what what else is in there.
Between the you know the 100 basis points and then bridging to the three to 400.
It's a little bit more than that but I would also say that as off the bat. We also judicially adds a backend semiconductor application areas and so the overall like the more volatile piece of it.
And microelectronics historically, it's been around 10% of sales. If you. If you look at the drop down to 7% of sales those are the more volatile pieces of it about 3% of sales.
And they are effectively nothing on a go forward basis. So then what's remaining.
That 7% is the E V in D B V based applications.
So that's the way you should kind of think about it the other exposures in microelectronics, two we talked about the mechanical piece, but theres also a laser based.
Pes as well, we just know that that's all kind of included in that 10 dropping to seven.
Okay and in that time.
Outside of the Westwood business that the component.
Type of components or products that are seeing the headwind is that more like precision motion.
The type of product or photonics correct.
Yeah more more of the so all of that a lot of it is concentrated in this segment in the in the robotics automation segment.
Not to say that there isn't any exposure elsewhere. It just happens to be mostly consolidated in that area.
Okay got it and.
I guess I mean, the the slowdown you're seeing overall I mean.
Yep.
The the the guidance I guess you know but.
I'm surprised a little bit that you know.
Given the backlog that you have.
And that you said that you know the past due orders or cut significantly senior shipping out of backlog that wasn't able to soften the blow a little bit more I mean could you comment on that.
Yeah, I would say it has softened that there was more of an abrupt change in China, China has had some volatility both from a macro perspective as well as around their incentives and stimulus that they've been putting in.
The COVID-19 locked out was it a little bit more of a number on the country and so because of that you know you and you can see this in the PMI and the exports in China. There was a bigger drop there. So I would say our ability to mitigate that yeah, there's really kind of the microelectronics headwind and then the China drop is really bad because of the higher backlog now that being said.
We do expect to exit the year with two or more quarters worth of backlog.
So while we're continuing to get at those reductions the areas, where there's the greatest increase in backlog and it happened to be at our medical base business says and that's somewhat hampered by the capacity of our facilities and so whereas our Ars are new check facility comes online at our new Manchester facility.
It comes online in early 2024 that we can start driving that higher growth coming out of the vertical solutions part of the portfolio.
But more in the in our precision medicine partner.
Yeah.
Okay. Thanks, and then just the last question I mean.
Obviously working through the model here, but I mean, it seems clear that.
Fourth quarter is expected to be a good step up from the third quarter in terms of revenue.
I mean first of all is that is that true and then what you know what how what kind of visibility.
Is there anything specific you have visibility to in the fourth quarter that that.
Results in that guide.
It really just depends on how you look at the range in the third quarter in the range of the full year, but to the degree that there's.
You have followed more of a step up in Q4, what is that I think that's continued ability to reduce capacity.
Uh huh.
And get more product out the door and so in other areas we are.
Are seeing surprising resilience and some of the industrial based applications, we're serving unrelated to China.
So there's areas there where companies are making investments in the U S and European markets. There is a little bit of a near shoring effect going on as well as just an increase in automation generally speaking because of labor shortages in those markets.
There is.
Little bit surprising better resilience.
We're seeing in those two that those application areas that is helping us a lot.
Got it alright, thanks very much.
Yeah. Thanks, Brian .
Once again, if you would like to have a question. Please press Star then one.
And our next question comes from Robert Baird.
Baird. Please go ahead.
Hey, good morning, Thanks for taking my questions or Yep.
So I I don't want to belabor this point around microelectronics, but and.
The other adjustments, but so if I'm doing the math right. That's about additional point of headwind coming out of microelectronics versus your prior guide then you layer on incremental China weakness, but if I look at the way your overall guide adjusted.
It looks like you also increased.
Certain areas because this would have been more punitive. So I'm just curious what areas may have been taken up.
To offset some of those incremental headwinds.
Yeah, I mean, as we as you know when you look at the back half of the year the precision.
Medicine area is actually doing quite well for a precision medicine and manufacturing area is doing very well. It's it's expected. The report you know high mid to high single digits.
And that's a part of that is we got some new product in there we have continued strength there.
Laser quantum branded products.
And we have continued our progress in reducing past due performance there.
And then overall our medical solutions. The Tai has just mentioned al.
We are seeing our customers have higher demand there is higher backlog that they're working on reducing.
Through their.
And users.
So that's.
Excellent.
Wow.
Okay.
R J that branded products.
So overall, we feel pretty good about that we are seeing a little bit of growth and in medical robotics.
Okay.
Yeah.
Okay.
That's just beat.
It needs to be supplied.
Provide shortages at our at our end customers unrelated to us.
But we are seeing growth there so the real a real only negative that in our portfolio right. Now is the microelectronics piece and then the pause and robotic spending in the China market, which you know.
It was partly caused by macro condition and partly caused by pullbacks in volatility and how they've been stimulating their economy, particularly around these areas E vs solar battery and robotic based investments.
Yeah, So big picture, if you really look at it Rob right.
8% of sales in microelectronics, a weakness there 9% of sales in China weakness there.
But in the rest of the portfolio a lot of resiliency in a lot of strength right now so yep.
Just around China Matthias you you've mentioned in your remarks, a couple of times around China recovery in 'twenty four.
And how would you frame up your visibility on.
That dynamic at this point.
Yeah, I mean, it's a good good question right of course it it's.
Yeah.
Based on what we're seeing right you look at the structural growth drivers.
In robotics and automation electric vehicles utter robotics are drivers in the China market.
We feel there continues to continued to be intact and there's this kind of a pause because of an extraordinarily strong year last year right. So don't forget that so they're probably got a handle a little bit of themselves. They're pausing. There is of course, a business confidence weakening issue, but we do feel that that will grow.
<unk> itself in the 'twenty 'twenty four based on what we're seeing.
Seeing with projects in the pipeline and in the comments from our customers as of this date.
Again, so that's what we're seeing and so it's more of a destocking pausing effect, we feel that the that the mid and long term is is continues to be attractive.
I see.
It was the last question.
We're all aware of kind of the new product cycle that they will be ramping up.
You mentioned some of those products may launch by the end of the year I'm. Just curious if you think about next year.
This is the cadence of new product releases does that wait more towards the first half.
24, or the second half 'twenty four.
It's a matter of timing of the launch and materialized nation of the actual revenue itself right. So worldwide.
Medical field, specifically as we launch new products.
Let's say at the end of this year and early in Q1. The reality is those products are going as part of the F. D. A qualification process of our end customers.
So the material.
The revenue impact in the first half would be relatively muted.
As we look in the second half it begins to kind of ramp up and it really is conditional upon you know how the individual customers clear through their processes that is why when we went out with the guidance of $50 million of incremental revenue coming from our medical solutions area. In 2025, we gave the guidance on <unk>.
2025, and 2024, knowing that 'twenty 'twenty four have the element of volatility associated with the FDA qualifications of our customers.
And so it is fair to say the back half of the year, we'll have more revenue coming from these products, but to get kind of specific around it gets a little difficult just because of that piece of that FDA process.
But and then as you can at least say yep.
Your release schedule favors more the first half.
From a yeah, it's customer by customer so there are certain customers getting products in the first half and there are certain customers getting product in the second half.
And so it really is customer by customer then you're talking about you know how the customers themselves are successful yeah. So smoked multiple products to multiple customers through our 2024, and then really fully ramped or close to fully ramped in 2025.
That's how you get to see it on the medical side on.
On the industrial side, we're also expecting an increase in the rate of launches in 'twenty 'twenty four which.
Which will also have.
Little bit less less large, but it also will have a supporting AR effect on growth to the company as well yeah. So.
We focus a lot on the medical side and the 50 million, but you kind of see what I commented on in my prepared remarks, we're actually mostly industrial products right. So, let's not forget about that.
Okay very good thank you.
Yeah.
Alright, Thanks Robert.
This.
A question and answer session I would like to turn the conference back over to Mr. Mittal.
For any closing remarks.
Thank you operator.
So to recap November had an excellent second quarter of 2023 we saw solid sales growth. Despite the headwinds in microelectronics into frozen China industrial robotics spending bill.
Beat our expectations for margins and profits.
We maintain a very robust level of backlog coverage, while reducing our past due backlog and we see continued strong deal wins in our medical businesses.
To accelerate into 2024.
Aggressive nicely our innovation pipeline and are excited for the large product launches happening later this year and next year in.
An event there remains very well positioned in the medical and advanced industrial end markets with diversified exposure to the long term secular market trends in robotics automation precision medicine, and minimally invasive surgery and industry total DAU.
In 2023 and beyond we will continue to focus on new product development design wins in high growth applications and doubling down on both ends of the grocers and driving cash flows and gross margin expansion.
In closing as always I would like to thank our customers our employees and our shareholders for their ongoing support I couldn't continue to be especially grateful for their dedicated efforts.
Before November I'm pleased who work diligently every day to tackle new opportunities and manage through new challenges. We appreciate your interest in our company and your participation in today's call I look forward to joining all of you in several months on our third quarter 2023 earnings call. Thank you very much. This call is now adjourned.
The conference has now concluded thank you for attending today's presentation.
Now all disconnect.
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Okay.
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