Q3 2023 Novanta Inc Earnings Call
Good morning, My name is Andrea and I will be your conference operator today.
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I would now like to turn the conference over to Ray Nash Corporate Finance leader for Nov Anther. Please go ahead.
Thank you very much good morning.
And welcome to the Vantiv third quarter 2023 earnings Conference call I Am Ray Nash corporate Finance leader of Nevada with me on today's call is our chairman Chief Executive Officer suppliers, Bostra, and our Chief Financial Officer, Robert Buckley.
If you've not received a copy of our earnings press release issued today you may obtain it from the Investor Relations section of our website at Www Dot <unk> Dot com.
Please note this call is being webcast live and will be archived on our website shortly after the call.
Before we begin we need to remind everyone of the safe Harbor for forward looking statements that we've outlined in our earnings press release issued earlier today and also those in our SEC filings, we may make some comments today, both in our prepared remarks and in our responses to questions that may include forward looking statements.
These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations any forward looking statements made today represent our views only as of this time, we disclaim any obligation to update forward looking statements in the future even if our estimates change. So you should not rely on any of these forward looking statements as representing our view.
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 you Ray good morning, everybody and thanks for joining our call November had a solid third quarter with strong operating performance delivering profit and cash flow above our expectations. Our revenue was in line with previously issued guidance.
In the quarter, we delivered $222 million in revenue, representing a 1% year over year revenue decline on a reported basis and 3% decline on an organic basis.
Excluding microelectronic applications our growth in the quarter was up low single digits.
We recorded gross margins of 47% in the quarter and an adjusted EBITDA margin of nearly 24%.
In addition, our cash flow was up over two times, the prior year and at more than 175% conversion to net income.
This operating performance reflects excellent execution by our teams in an increasingly challenging macroeconomic environment.
The November business model with diversified exposure to secular high growth markets has proven resilient under multiple geopolitical and macroeconomic scenarios, our proprietary products and technologies are well positioned.
In medical and advance industrial applications with long term secular tailwind such as robotics, and automation health care productivity and precision medicine.
Medical applications now make up nearly 60% over sales versus single digit percentage of sales a decade ago, which we believe provides an event with greater resilience during fluctuating macroeconomic conditions.
We feel that our strong customer relationship with the leading Oems in these medical and advanced industrial applications, the strength and diversification of our portfolio and are sticky business model will allow <unk> to deliver and drive better performance through the economic cycles.
In the third quarter in an event that team has made excellent progress in bringing down lead times to our customers. The consequence of this change is that customers do not need to place long term orders anymore, resulting in a book to bill or 0.8, which was in line with our expectations. However, this change in lead times improves customer satisfaction and allows the business.
To better trend with end market demand dynamics.
Looking to the business environment more broadly in the basketball with months, we start to see more caution in some of our customers ordering behavior with the rapid rise in interest rates in the last months continued weakness in China, and expanding geopolitical unrest, our OEM customers, who have seen their customers slowed down ordering particularly in.
The industrial and more recently some life science applications.
While this has clearly been well this has clearly been evident in the global purchasing managers index says for industrial spending the rapid rise in interest rates has caused other capital credit markets to be more cautious as well deferring purchases until the new year.
Given the strong secular growth drivers behind our markets and our customers' engagements on innovation, we see these current dynamics as temporary disk.
Despite the impact from the fourth quarter.
Robert will discuss these dynamics in more detail when he covers guidance.
It is important to note that an event the playbook and business model have demonstrated the ability to effectively navigate short term headwinds.
Corpus there's while at the same time staying focused on making investments that expand our presence in secular high growth markets.
We continue to see active engagement and urgency with our customers to ensure their new product launches are a success.
As a result, we're seeing a broad new product Super cycle entering late in 'twenty 'twenty, four and in 2025 and beyond with key drivers, including smoke evacuation is deflation robotic surgery next generation lithography laser beam steering for advanced material processing, such as laser additive manufacturing and <unk>.
Crow machining.
Robotic end effector sensors and mobile robotics.
Given our sticky business model in these long lifecycle growth applications, we strongly believe the mid and long term outlook over our business our end markets and the November organic growth algorithm to be intact.
Looking back at the third quarter, the border and mortgage teams work that medical markets continue to be strong industrial markets are decelerating in line with the PMI indices and interest rate environment and microelectronics is bottoming at a low level.
Excluding microelectronics and event the revenue growth would have been up low single digits year over year in the quarter.
Going into more detail sales to medical markets remained strong in the quarter growing 12% versus the prior year and making up approximately 57% of total November sales.
During the quarter, we saw increased shipments to many of our old medical OEM customers with noteworthy strength in minimally invasive surgery equipment and consumables.
Surgical robotics DNA sequencing.
And the integrated operating room equip these categories all saw double digit growth in sales year over year, where long term secular growth is driven by patient surgical procedure growth rates and advancements in Biopharma technologies, including next generation DNA sequencing.
We continue to find new growth opportunities in our medical markets. For example, we see opportunities to expand our presence in DNA sequencing DNA sequencing to the broader precision medicine market, including spatial biology, multi omics and other clinical life science applications by combining the proprietary move into technologies into use.
<unk> solutions for our customers.
In doing so we believe we can help our customers win by shorts and shortening their time to market and enhancing their differentiation.
In addition, we continue to remain very excited about the long term secular growth of minimally and robotic surgery.
Markets with Nevada, continuing to win with our next generation smoke evacuation endoscopic pump technologies precision motion drives and are forced to have sensors.
Turning to advanced industrial markets, our sales in the third quarter, excluding microelectronic applications were down 6% year over year. It made up approximately 36% of total November sales.
This sales decline was slightly more than we expected due to the rapid rise in interest rates and continued weakness in China impacting the industrial robotics and automotive sectors.
While these trends are expected to worse and somewhat in the fourth quarter customers remain very engaged they are using the slowdown to catch up with next generation innovations.
As a reminder, in November plays in advanced industrial applications with mid to single digit growth driven by secular growth trends, such as industry, four, though robotics and automation and precision manufacturing.
Finally, our microelectronics markets were represented less than 8% of sales in the quarter.
Dynamics are roughly the same as we said in our last call in the quarter, we saw nearly a 40% decline year over year from the cyclical downturn in this market, particularly driven by a P. C. B a via hole drilling business, which is now run rating at just a couple of million dollars of revenue per quarter, which is immaterial to overall company results.
We estimate that the ogle drop in the microelectronics market will be a 400 basis point headwind on totaled about the sales growth for the full year.
Again, excluding microelectronics November revenue in the third quarter will be up low single digits year over year.
As we look out into 'twenty 'twenty, four and 'twenty to 'twenty five we do however remain excited that the composition of our exposure to this market will be a more secular growing a less volatile business.
As we mentioned in prior calls we believe our exposure to next generation massage therapy, we will continue to grow positioning us well to couple of capitalize them or less cyclical element of the industry.
With at least a decade's worth of grow growth still ahead of us.
From a regional perspective in the third quarter sales to North America grew 11% year over year, and Susan Europe declined by 2%, which reflects the challenging macroeconomic conditions in this region and its connections with China market sales in China, which was that represented about 7% of overall.
Sales declined 35% year over year, which was caused by the decline in microelectronics revenue the industrial robotics, Baas and overall macroeconomic uncertainty in China right now he's regional trends are expected to continue in the fourth quarter.
Now, let me touch on some of them event, our strategic growth metrics for our design wins in the quarter. We saw significant progress with numerous large customer wins, we had another large win with a leading minimally invasive surgery OEM, where their platform will now incorporate our next generation smoke evacuation Insufflator technology.
Based on our design wins in this market, we expect no ventas technology to be the standard of care for minimally invasive surgeries for at least the next decade.
In addition in the quarter our medical solutions segment also had a large design win with a leading player in the integrated operating room market, where our video and data management product will be integrated into a new platform lounging in 2020 five.
Finally, this business closer design win within the sports Medicine, Erythrose Skippy market with our proprietary bump technology, which is also expected to launch in late 2025 and expands our market share in this application.
In the precision medicine, and manufacturing and robotics and automation segments. We also had several exciting wins.
We continue to make significant progress expanding our exposure to next generation of asarco fee equipment, an area, which has a decade decade long growth outlook, given recent customer announcements growth at MS. Application is now expected in late 'twenty, 'twenty, four which will accelerate in 2025.
We're also very excited by our recent design wins in our forest sensor product line, which enables a central and of arm touch for robots in industrial and medical applications.
After significant after dish business has started shipping into the medical space, representing a significant milestone in the realization of a critical value driver for the Agi acquisition.
In addition, within our robotics and automation segment. We recently won a new multimillion dollar project with a leading robotics player.
He was planning to integrate our miniaturized high performance server drives into their next generation of advanced mobile robotics. This opportunity will start to ramp up in 2025.
We're excited by the impressive accumulation of customer design wins, and our strongest innovation pipeline in a decade, we remain highly focused on executing our new product Super cycle, starting late in 2024 and into 2020 fives and.
They reiterated Wisconsin as our overall long term growth framework of consistent mid to high single digit organic growth through the business cycles.
Next our vitality index in the third quarter was about mid teens percentage of sales, which is roughly the same as prior quarter and in line with our expectations.
Our new product pipeline is geared towards intelligent subsystems in applications, such as minimally invasive surgery robotic surgery.
X generation precision medicine laser beam steering for micro machining electric vehicle robotic tool changers precision motion solutions for mobile robotics and Weyerhaeuser automation.
After our next generation products start launching with customers in late 'twenty 'twenty four we expect our vitality index to rebound to above 20% driving sustained growth in secular growth markets move.
Moving on and I'm proud to sprout to say, how our teams are embedding the Nevada gross system or N G S into the way we work.
During the third quarter, we held the President's Kaizen week in our medical solutions segment, bringing together dozens of our senior leaders and many other team members to focus on process improvements and problem solving a critical areas for the business. So it's just the ramp of manufacturing of our in house medical consumable products at our new Czech Republic factory.
We're also using NDS project management tools to compress our time to market of MPI lunches and compensate for delays due to supply chain shortages in the last 18 months.
A critical tool. We're deploying is 80 20 portfolio minutes, we're using this approach to rationalize our portfolio, reducing our exposure to products that are commoditizing or nearing end of life.
We're taking these actions to decrease complexity improve profitability.
In light of near term market conditions and to allow that the teams to focus more on ramping the new <unk>.
The multiple new products that will be coming online late in 2024.
Overall, the stools and kaizen events are becoming a critical part of her and she is deployment, our culture and demonstrating our commitment to continuous improvement and our ability to solve complicated problems that benefit or a benefit our operating performance as well as improve customer satisfaction.
Next I'd like to give you a brief update on no event those acquisition activities acquisitions remain momentous top priority for capital allocation and you should expect us to continue to be a critical part of our growth strategy.
We have multiple active conversations underway today.
And we would expect at least one of these materializing before year end.
You can expect us to lean in on expanding our presence in the Mega trends I talked about earlier, we view disruptive macroeconomic environments, there's an opportunity to take advantage all for M&A activity as sellers changed their expectations in light of higher interest rate environment.
We expect to be an active acquirer in this environment in.
In conclusion, we had a solid third quarter with excellent operating performance delivering profits and cash flow ahead of expectations with sales in line with expectations.
Despite the short term micra Micra, Luke we believe November <unk> long term growth, our strategic position and continues to be extremely strong and we're staying the course on executing our strategy and capital deployment model.
With that I will turn the call over to Robert to provide more details on the operations and financial performance Robert.
Thank you Matthias and good morning, everyone. Our third quarter non-GAAP adjusted gross profit was $105 billion or 47% adjusted gross margin compared to $102 million or 46% adjusted gross margin of third quarter of 2022 for.
For the quarter adjusted gross margins were up year over year by over 160 basis points and up sequentially by 30 basis points. This outcome was better than our expectations and represented strong execution by our teams to achieve this result.
Our continued progress with gross margin expansion in 'twenty to 'twenty three is being largely driven by the deployment and successful adoption of the Nevada N G as productivity tools in our factories.
The 47% gross margin puts us on a solid track to achieving our full year goal of expanding gross margins by 100 basis points.
Moving onto the operating expenses R&D expenses were roughly $22 million or approximately 10% of sales third quarter SG&A expenses were 40 million or roughly 18% of sales.
Overall operating expenses as a percent of sales were flat year over year in the quarter, while we continued to invest in new product innovations and prepare for the launch of multiple new product platforms. The organization also demonstrates strong cost management.
Adjusted EBITDA was approximately $52 million in the third quarter of 2023 or 23.6% adjusted gross adjusted EBITDA margin.
Versus $49 million in.
In the prior year on.
On the tax front, our non-GAAP tax rate for the third quarter 2023 was 15%. This differed from the statutory rate due to jurisdictional mix of income and some timing related tax benefits are.
Our non-GAAP adjusted earnings per share was <unk> 85 cents in the quarter compared to 81 cents in the third quarter of 2022 third.
Third quarter operating cash flow was approximately $45 million, which is up greater than 200% versus the prior year.
We're pleased with this result, which results in strong profitability in the quarter and some progress in reducing our inventory balances.
We ended the quarter with gross debt of $357 million versus gross debt of $413 million in the second quarter of 2023, and our gross leverage ratio was one eight times, our net debt was $281 million, putting the company in a great position to fund further acquisitions.
Turning to backlog and bookings our team again made great progress, reducing our past due backlog to customers by more than 24% sequentially, while still ending with a backlog of $536 million, which is nearly two times pre pandemic coverage levels are remaining past due backlog is now immaterial and so.
We have started to pivot to reducing lead times and on time shipments of our new orders to historical levels. Our book to Bill in the third quarter was 0.8, which is in line with our expectations.
I'll now turn to an update about the performance of our operating segments first I'll speak to the precision medicine in the manufacturing segment for the third quarter of 2023. This segment demonstrated strong financial performance overall with strong gross margins and strong EBITDA margins, despite weaker than expected revenue growth.
This segment delivered 1% year over year growth. This was lower than we expected as industrial copper customers delayed purchases due to the higher interest rate environment and new geopolitical disruptions.
The Bill was 0.72 acts in the third quarter, which reflects continued normalization of lead times as customers adjusted their level of backlog coverage to pre pandemic levels and some softening of demand for life science precision medicine, and market, which also experienced the impact of higher interest rate environment.
Within precision medicine, new product revenue stayed greater at 20% of sales in the third quarter design wins in the segment were down year over year, driven by timing and difficult comparisons as in the last few quarters. Despite this for the full year of 2023, we still expect solid design win growth in the range of 10 to 20.
That year over year.
We're excited about the progress being made with multiple strategic customers. For example, we recently completed new key milestones to grow our exposure to next generation lithography applications. These customer opportunities gives us confidence we will continue to see growth in this segment heading into future years the.
Precision medicine and manufacturing segment adjusted gross margin was nearly 52% in the quarter, which was up 100 basis points 180 basis points year over year. We are proud of the performance of our manufacturing operations teams, particularly that they embrace and institutionalized in Nevada to grow system.
Turning to robotics and automation segment. This segment experienced a revenue decline of 15% year over year, which was in line with our expectations and our prior guidance.
The cloud continues to be mainly driven by steep year over year declines in microelectronics applications, particularly or a P. C. P. A mechanical via hole drilling applications, which declined over 70% and is now an immaterial level of sales for the company.
In addition, as discussed on our last call in the quarter. This segment saw an impact from weakness in the sales of industrial robotics, largely caused by China and the slowdowns in the automotive manufacturing.
The overall book to Bill ratio in this segment with 0.79 again, driven by the microelectronics decline in industrial demand dynamics in China, microelectronics experienced a negligible level of bookings in the quarter.
Positive side or ATI business saw a book to bill greater than one in the third quarter, indicating that the decline in industrial robotics is stabilizing.
New product revenue was roughly 10% of total sales in this segment in the quarter.
As a reminder, this ratio was lower than 2022, because the metric now includes new product sales from our ATI business line, which is having a dampening effect on the overall segment ratio.
Adjusted gross margin for robotics, and automation segment came in at roughly 51%, which was roughly flat sequentially and up year over year by 200 basis points.
Again, we are proud of the progress our team for making by adopting that don't have the growth system to drive strong margin performance, while reducing lead times, improving on time delivery and improving product quality despite year over year revenue declines.
A further testament of our progress this segment achieved a rare preferred supplier rating from a top five medical customer.
Finally, and medical solutions.
This segment experienced reported revenue growth of 14% year over year, which was stronger than our expectations.
Growth in this segment continues to be driven by strength of elective surgical procedures as well as our <unk> business line, where the business continues to perform well now that supply chain challenges have been mitigated.
Medical solutions segment saw a book to Bill of 0.87 in the third quarter with bookings up 2% year over year. The vitality index in this segment was reduced versus prior year.
And is that mid teens percent of sales level in line with our expectations.
As we mentioned in prior earnings call. This is largely driven by our first generation smoke evacuation insufflator product, reaching its four year milestone. We expect this metric to rebound in 'twenty, Tony or as we launch our second generation smoke evacuation insufflator and new endoscopic pumps.
When activity in this segment was very robust in the third quarter. Despite tough comps in prior year. This was driven by another impressive design win and the minimum invasive surgical space related to our next generation. It's the planar technology and an impressive design win with our integrated operating room technology products with a leading OEM in that space.
Overall, our business performed as we expected in the quarter. This is a testament to the high caliber of talent and our business teams and their ability to navigate and work together to deal with numerous challenges despite rapidly changing economic circumstances.
We are proud of the team's performance.
Turning to guidance.
While we still have historical high backlog coverage heading into a more uncertain demand environment, we're working closely with our customers the schedule shipments in a manner that avoids our customers building inventory and which is in line with their end market demand. We feel this approach avoids any unnecessary revenue volatility in the future and.
Our revenue from being disconnected from end market demand. This is factored into the fourth quarter revenue guidance that we expect will lead to a book to bill ratios in the fourth quarter comparable to the third quarter.
From an end market perspective, we continue to expect to experience growth in our medical end markets. Despite temporary weakness materializing in precision medicine and life science end markets due largely to the interest rate environment. Despite these near term customer deferrals that we expect will manifest in the fourth quarter, we remain confident in the long.
Term secular demand in these markets in the medium term demand, we expect from customer launches of new products in the second half of 2024.
As an example, we continue to see strong customer demand and urgency for a second generation smoke evacuation technologies, our new endoscopic pump platform, a new integrated operating room technology platform and new optical subsystems for customers in the precision medicine market, including spatial genomics and biomarker.
Therefore, we continue to invest with confidence the better positioned ourselves to serve the secular growing market.
In our advanced industrial end markets, representing slightly more than 40% of overall sales global purchasing manager indices remain below 50, indicating industrial capital spending remains in contraction. We are now lapping the fourth quarter in a row of PMI is falling into contraction territory led by a cyclical downturn in the microelectronics.
Chronic and macroeconomic weakness in China, starting in the third quarter of 2022.
Industrial capital spending slowed more broadly in the third quarter of 2023, following a significant spike in interest rates, particularly in the U S and further weakening in China as we enter the fourth quarter. The geopolitical environment has worsened, particularly in the middle East and industrial spending has slowed further as industrial.
Manufacturing customers had deferred purchases are still starting to feel the pressure of the spike of interest rates.
While there are signs of capital spending stabilizing by year end after what will be five quarters. The PMI is below 50 and have interest rates stabilizing at these elevated levels. The combination of volatility in the macroeconomic and geopolitical environment in the lead times of our business compels us to revise our fourth quarter financial expectations.
From our original expectations.
And also down sequentially from the third quarter.
Starting with revenue guidance for the fourth quarter of 2023, we expect GAAP revenue in the range of 208 million to $212 million, which represents a revenue decline of approximately 5% on a year over year basis in the full year of 2023, we now expect GAAP revenue in the range of $878 million to.
882 million. This represents low single digit growth for the full year, which is below our original expectations for the second half of 2023, However, based on deep conversations with our customers. We expect this to be a temporary deferral and demand.
Which further emphasizes the need to focus and allocate our resources to the secular growing and less cyclical end markets.
On a segment level in the fourth quarter.
We expect precision medicine, and manufacturing segment revenue to be flat to down 4% organically on a year over year basis, while there are aspects of our business doing well demand deferrals in industrial applications and some life science applications are impacting the segment's growth in the fourth quarter, although near term demands.
We had softer than expected customer activities, particularly around new product introductions remain active and design win activities continue to accelerate.
Our robotics automation segment is expected to be down 9% to 14% year over year in the fourth quarter.
Year over year decline is mainly driven by the continued pause in industrial robotics spending, particularly in China and continued weakness in microelectronics.
While there are signs that demand is starting to stabilize the higher interest rate environment needs to further normalize at these elevated levels before it demand fully recovers.
Finally, our medical solutions segment is expected to demonstrate year over year revenue growth in the 4% to 6% range in the fourth quarter.
While there are more difficult comparisons to the prior year overall demand in this segment continues to align with global surgical procedure growth rates cut.
Customers in this segment are working with urgency to accelerate and finalized launches of the second generation smoke evacuation technology and to focus their product portfolios on their new innovations our medical technologies continue to Incent strong demand from our customers, resulting in full year 2023 revenue growth in the mid teens.
Laurie.
Moving on to overall Nevada's adjusted gross margin, we expect gross margins in the fourth quarter to be approximately $46, 5% to 47%.
Gross margins in this segment will largely mirrors the margins achieved in the third quarter increases or decreases per segment will only be based on changes in sales volume, regardless overall margins should meet or exceed our full year expectations of 100 basis point improvement year over year.
For the full year 2023, we now expect adjusted gross margins to be approximately 46, 6% to 46, 8% a testament of our teams adoption of the romantic gross system, turning to R&D and SG&A expenses are expected to be approximately $64 million to $65 million in the fourth quarter the increase in cost year over year.
<unk> is largely driven by labor cost increases and further investments in our innovation pipeline and some further investments in our commercial engine as we increase our investments in some upcoming precision medicine applications.
Depreciation expense, which was.
About 3 million in the third quarter would be closer to $3 7 million in the fourth quarter from the increased investments in our facilities.
Stock compensation expense, which was roughly $6 million in the third quarter I believe roughly the same in the fourth quarter for adjusted EBITDA. The fourth quarter of 2023, we expect range of $42 million to $45 million of the full year of 2023 for adjusted EBITDA, We expect a range of $193 million to a 196.
Yeah.
Interest expense, which was nearly 7 million of third quarter is expected to be roughly $6 5 billion in the fourth quarter of 2023, driven by the continued rise in interest rates, partially offset by good success, we had in the third quarter paying down our debt balances. We continue to focus on paying down debt mitigate the impact of rising rates.
We expect our non-GAAP tax rate to be about 18% in the fourth quarter of 2023, and we expect our non-GAAP tax rate to be approximately 16% for the full year of 2023 largely in line with 2022.
Diluted weighted average shares outstanding will be approximately 36 billion shares and adjusted diluted earnings per share. We expect a range of 59 to 66 cents in the fourth quarter, but the full year 2023 adjusted earnings per share is now expected to be the range of $2 98, and $3 and five.
Finally, we expect cash flows to stay strong in the fourth quarter as we continue to focus on our efforts to bring down our inventory levels and from strong customer collections.
In addition, our new Manchester UK optical subsystem manufacturing facility at our new Czech Republic Medical consumables manufacturing facility are both on track and scheduled to be completed on time.
By some large states shifting slightly remained under increasing pressure from our customers to accelerate our readiness, which includes completing these two facilities in qualifying the production of our products for our customer product launches.
These facilities are expected to see the launch of significant new revenues tied to our second generation smoke evacuation insufflator, new precision medicine products and next generation lithography based applications as always this guidance does not assume any significant changes to foreign exchange rates.
In summary, Novartis performance in the third quarter of 2023 was solid and reflected excellent execution by our teams we beat our own expectations for margin expansion profit performance and cash flow. We saw continued growth in our medical end markets, which offset a growing softness in industrial markets.
This dynamic was yet another testament to the diversification and resiliency of our business portfolio.
Despite an increasing challenging interest rate environment and macroeconomic weakness we are confident in our ability to navigate the short term and deliver on an accelerating secular growing strategy.
Overall, despite industrial capital spending environment in contraction territory for five quarters longer than historical down cycles. Our business has held up reasonably well while the economic climate is not expected to worsen nor improved significantly over the next couple of quarters.
We do see our long term growth prospects remaining strong and even accelerating on the back of exciting new product launches in the second half of 2024, and our exposure to high growth end markets in both the medical and advanced industrial applications.
We remain very grateful for the outstanding performance of our employees and their efforts to help us be successful in a dynamic environment and we remain grateful to our customers confidence and faith in our ability to deliver to their needs. The innovation they need to be successful, we look forward to continuing to deliver on our commitments to our employees our customers and our.
<unk>. This concludes the prepared remarks.
We will now begin the question and answer session.
Good question.
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Our first question comes from Lee Jagoda.
JMP Securities. Please go ahead.
Hi, good morning.
Good morning Lee.
So just I guess, starting with you if you'd referenced that there's this temporary push out or deferral and customers are sort of leaning on you to.
Carry their inventories at least temporarily should we view this as a one quarter push and something as simple as when the calendar flips there'll be back to ordering and taking product or is there something else in the macro that we have to keep an eye on it and it could be a multiple quarter push out.
<unk>.
I think there there's a bit of a little bit of an overreaction by some customers in the fourth quarter to deal with them with the rapid rise in rates and the uncertainty in the environment obviously the.
The war in the Middle East.
Some shippers through People's backs.
Than the than what we would expect in 'twenty 'twenty four so I do think things will begin to recover a little bit as we get into 2020 for them I think customers are really looking and taking the opportunity to to focus in on those product launch cycles and really make sure that they're successful in the back half of the year. So even today, we have we have.
Customers in our facility going through the qualification of product launches and make sure that those things are on track and to make sure that we're taking the necessary actions to wrap up to the volumes that theyre looking for but most of that is looking at it as a second half pick up in demand associated with those innovations.
Okay, and then specifically on the microelectronics business I know you've won a whole bunch of stuff in the UV and D. B U V that should kind of drive multiyear secular growth as.
Can you give us some.
Sense of the timing of those.
Yeah.
Yeah, well first of all where we're extremely excited about this development, we feel even more confident about the long term potential and growth in this application.
I mean, there were some public remarks by I would say a major player in this industry and our customer.
Which indicated a slight shifts and in their demand profile in 2024 from let's say early 2020 for two more later in 2024.
So this is more of a timing thing than a fundamental thing and.
Actually as a matter of fact, we feel more confident.
As we're solving a pretty big problem.
For our customers. So it's a slight shift towards the latter part of 2024 long term even more excited about this opportunity.
If you would maybe just spend a minute or two on the problem you're solving and why they know vantiv solution is the right solution in the area of microelectronics to solve this problem.
Yeah, Yeah, I gotta be a little bit careful with this I would say I will answer it more holistically.
You know when we say that an event a M provides mission critical technology solutions for our customers. It basically means that we.
Send them mentally solve or improve.
Let's say throughput. So therefore produce a significantly higher level of parts per time unit yield or cost of quality right. So in terms of and that's again, a throughput and a cost environment.
And Hans Basket Dare capability to produce something that has never been done before I would basically say this solution oversold free right and it has a tremendous impact on and user basically yield.
<unk> productivity throughput uptime.
And so we feel very good about it but this is a typical move into <unk>.
Solution that we employ also in robotics or a broader material processing or I would argue DNA sequencing right. So we enable productivity improvements for the end user and in our direct customers. So for example in DNA sequencing is really driving that.
Cosper protests in genome down as a result of our core engine into those applications right. So it's a very similar.
Trend and approach across these applications and customers, which is why yeah were intrinsic and detailed and very different shaded part of their supply chain. So when we gave all these examples the themes typically or the solutions typically head on many of these themes.
In parallel right, which is ultimately why.
We're extracting value from it our customers are extracting value from it in the end users are extracting value from it.
The only thing I would add there is that we have used in the acquisition strategy as well to acquire in technologies that allow us to redefine the competitive landscape and so as a consequence, we don't offer solutions that a competitor could batch we offer solutions that we view.
Niklas combined through a number of different acquisitions that our competitors haven't even thought of or looked at that allows us to really offer a solution to a customer from their lands from their eyes, and so I think that's ultimately been a big differentiation that we've had is that we don't offer solutions based on the widget that we offer.
We offer solutions based on what the customer is looking to solve.
Got it and just I guess, one more and I'll hop back in queue as it relates to M&A, you've kind of teased, we'll see something before year end can you give us any framework around either size mix of business that you're looking at anything to kind of lead us down a path in terms of what youre looking to acquire.
At this at this point.
Yeah, I think what we've said is that yeah listen we're leaning into these macro trends that we've discussed around the overall growth framework is we get more content and so more unique.
Ways of solving a problem like what Walmart suggests that right in his previous remarks into these high growth applications and so of course, you know we have had a tendency over the years to be more geared towards medical end markets as well as growing advanced industrial end marks.
Robotics and automation so.
You can expect us to continue to lean into those trends.
And and further enhance I think our exposure into those end markets. As a reminder, 60% of our business is now or close to it in medical end markets.
That's up from.
I would say mid single digits 10 years ago, that's both organically as well as through acquisition and we liked that general exposure. So let me let me leave it at that.
Okay. Thanks very much.
Thanks Lee.
The next question comes from Brian Drab with William Blair.
Go ahead.
Alright, thanks for taking the questions.
First good morning, Robert.
Morning, Robert You said and I, just kind of missed the all the context, what you said acceleration in 2020 for potentially can you just restate.
Restate that and elaborate on that.
Drivers that you were talking about at the moment.
Yeah, So I would say regardless of how the market performs or second half of the year of 2024 will be accelerating on the back of new product launches.
So we have a number of customer launches that we've talked about in the past. They we have launches now associated with our second generation smoke evacuation platform. There are a handful of customers launching products in the back half of 2024 around that we have customers are looking to launch and ramp as the ties just spoke about our next generation lithography.
Loosens.
And we have a couple of new design wins around integrated operating room based technologies and some precision medicine based technologies and so a lot of these things.
Were meant to be spread out across 2024, I think what we're looking at now is a little bit more of a backend loaded 2024 as a consequence of people really taking the time to make those launches successful I think the urgency around customers has increased to make sure. They are successful to make sure that we don't have slips as well.
Launch the products make sure there's no quality fall out to make sure supply chains are in the right places in order to meet their needs and making sure. Our facilities are there, making sure that people are there and so forth.
And so that's the activity that we're really looking at it obviously in this uncertain environment around the macro and the geopolitical and the interest rates you know it was easy for a lot of customers to take a pause for the remainder of the year, but that is not an indication of them taking a pause in their innovation innovation is clearly accelerating.
And they want to make sure it's done right and so we're expecting to ramp up in the second half of the year.
Got it okay and.
Yeah. So that's what I thought you were saying that maybe it's a little more backend loaded in and this is all related.
Too you know you'd been talking about the $50 million in incremental revenue opportunity.
I guess I get that part of what you're talking about or it sounds like this is even a broader kind of second half of 'twenty.
Some other stuff moving in from first half to the second half as well.
Yeah, Yeah, that's correct and some additional stuff too right. So we're basically yeah, we call that Brian there are new product Super cycle, because there's a lot of different products and application.
<unk> are coming together in the you know later in 2024 and 2025. So you know the messages loves it and we got a short term macro that is a bit more of a temporary headwind, but where we're staying just razor focused on these new product launches with our customers that really.
A driver of long term growth. So that's that's the did the upshot.
Got it and you know looking at the gross margin and you're really having a good year in terms of gross margin this year.
How much can you tell us about 'twenty 'twenty four in terms of gross margin because you have this project.
This transition of the consumables manufacturing that that should get you a healthy.
Margin boost next year, I think and can you talk about the timing of that and.
Is it going to be tough to get 100 bps of gross margin and 24 after such a solid step up in 'twenty three.
I don't think so I think we'll be able to still expand gross margins another hundred basis points.
No I think that there are obviously you know there there'll be a little choppiness in the quarters as a consequence of the new products being launched and the mix ratios associated with that.
You rightfully pointed out the consumables are a lower gross margin than the rest of the business.
However, there are other parts of the business a lot of our new product and innovation is being launched at a 50% or greater gross margin and so it really that that mix effect will be choppy throughout the year, but overall for the full year, we should be able to expand the gross margins 100 basis points all else being equal now obviously, if we do an acquisition that can change things.
But for the most part the base businesses their performance particular as they have been really embracing and institutionalizing. The Ngls process I think that's it gives us the confidence that they can continue to deliver these results and in addition, I think Brian what we said in the prepared remarks is that we're also continue to appear.
Why 80, 20 portfolio management tools, which is basket rationalizing our portfolio focusing for gross margin and profitability as well as creating the capacity for the growth right. So that we we basically phase out a lower margin.
[noise] less productive products that are you know either commoditized or more end of life. So that that's another.
Aspect that isn't all going process within the cost within the company, but that we're looking specifically in 'twenty 'twenty four to execute them.
Okay are we seeing the benefit from that.
Syllables transition already or is that something that.
It's really just felt in the first half of 'twenty four.
Yes, it's fair.
First and second half of 'twenty three fourths of the products start ramp full production goes we'll probably go.
Roughly around the end of December so the full effects of that really won't be felt until 2024 and then the launch cycle around production of the medical consumables will be will be very customer specific and so it depends upon how customers want to stock.
Safety stocks around that it depends on how their qualifications work out their FDA processes.
And so the full effect, so really a back half of the year is the easiest way of thinking about it where we stopped all new products all new medical consumables, our launch out of that facility now similarly at our Manchester facility, we will be launching all new products out of that facility as well so that facility will be up and running.
Really by the end of the first quarter.
Fully in production phase and so products will be coming out of the second half out of that facility again, putting us in a great position to deliver a higher gross margin. Yeah. And then you have the in some of the other product categories more and more attempts and subsystems, which you know have a higher margin profile as well also that will lounge.
In the second half so think about laser beam steering or precision motion related intelligence sub systems right that are starting to gear up in the second half of 2024 as well.
Okay. Thanks for answering those questions.
Absolutely.
This concludes our question and answer session I would like to turn the conference.
Brendan Foster for any closing remarks.
Thank you operator, so to recap November had a solid operating performance in the third quarter of 2023, we beat our own expectations for margins profit and cash flow and saw solid sales and medical markets, helping to offset declines in industrial markets.
Maintained a robust level of backlog coverage, while reducing our past due backlog and we see continued to wins in our medical businesses that should help partially mitigate growing pressures in the industrial capital spending.
We're progressing our innovation pipeline and are excited for the large product launches happening later next year November remains very well positioned in the medical and advanced industrial end markets with diversified exposure.
Two long term secular macro trends in robotics, and automation precision medicine, minimally invasive surgery and industry for Dow in 2023 and beyond we will continue to focus on executing our new product Super cycle design wins in high growth applications and doubling down on the November gross system driving cash flows and.
Gross margin expansion in closing as always so we'd like to thank our customers our employees and our shareholders for their ongoing support and commitment.
I'm continued to be impressed in the specific specifically grateful for their dedicated efforts of all our November employees, who work diligently every day to tackle new opportunities.
As through new challenges and make Nevada, great place to work.
We appreciate your interest in the company and your participation in today's call I look forward to joining all of you in several months on our fourth quarter and full year 2023 earnings call. Thank you very much the schools now with journey.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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Yes.
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