Q2 2019 Earnings Call
Good morning, My name is good and I will be our conference operator today.
At this time I would like to welcome everyone to the Novanta incorporated 2019 second quarter earnings call.
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After the speakers remarks, there will be a question and answer session.
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I would now like to turn the conference. So why don't we start re Nash corporate Finance leader. Please go ahead.
Thank you very much good morning, and welcome to Novanta <unk> second quarter 2019 earnings Conference call.
I am really nasty corporate corporate finance leader of Novanta.
With me on today's call is our Chief Executive Officer, Matthias Gloucester, and our Chief Financial Officer, Robert Buckley.
If youve 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 Novanta 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 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 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.
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.
Hi, I'm now pleased to introduce the Chief Executive Officer of Novanta Matthias cost right.
Thank you Ray good morning, everybody and thanks for joining our call no rental performed well in the second quarter of 2009 team delivering on both our revenue and profit promises to our shareholders.
Our company delivered $155 million in revenue, representing 4% year over year revenue growth on an organic basis and 3% on a reported basis.
Our adjusted earnings per share was 54 cents, which was up 6% from 51 cents last year.
Adjusted EBITDA was $31 million.
Our team executed very well in a deteriorating industrial capital spending climate.
Oh, Ventas positioning is favorable with over half of our revenue in medical markets that are structurally growing.
We remain laser focused on growing faster than the market with proprietary motion they came out with on X capabilities.
In a diverse set of applications driven by secular industry forward, although precision medicine and health care productivity trends.
We are strongly investing in innovation and commercial capabilities through business cycles to enhance our proprietary technology position and long term sustainable growth potential and secular growth applications, such as robotic surgery minimally invasive surgery DNA sequencing advanced material processing, a precision automation and robotics.
In the second quarter, and we continued to see solid momentum and success in our efforts to introduce new innovations to our customers to date, we have introduced three or five reports over the five planned this year.
Launched a new integrated into our product with a large medical customer expanded into multiple new robotic surgery platforms and see tremendous momentum with our latest inflator products with smoke evacuation functionality.
New product revenue year to date grew over 30% year over year, our of utility index, which is revenue from new product launch in the last four years in the quarter exceeded 25%.
Sales for the first time versus mid single digit percentages, a few years ago.
Our year to date design wins increased by over 20% and we are expecting accelerating design win momentum in the second half of 2019.
All in all I'm proud of the strong performance by our team in the second quarter as we continue to see the early benefits of implementing our November grow system, driving sustained long term growth and operating performance.
An important element in our capital deployment strategy is M&A and the second quarter, we saw opportunity to accelerate our strategy of expanding into intelligent subsystems with proprietary technologies.
We closed two tuck in acquisitions in Ginnie I've met exchange second quarter, Let me just close a third one Argus, let me touch on each of them briefly.
In the last earnings call, we already reported on the small tuck in technology acquisition of Virginia Ingenious provides OEM customers with intelligent motion control solutions on high performance high power servo drives.
The acquisition of ingenious Gan based motion control solutions is a strategically important step forward in developing and selling intelligent subservice the subsystem solutions through our precision motion customers.
In precision robotics and automation applications.
The Ingenio theme is phenomenal and the reception of the Ventas customers through Virginia has technology is tremendously encouraging.
In June we closely monitor small tuck in acquisition open bad exchange, which expands the position over and my Es segment further into the integrated operating room market.
The integrated or also referred to as digital art.
He is a growing opportunity for novanta, where data generation devices surrounding the patients jury surgery need to be connected to each other and the hospital information system, such that data images and video.
Could easily be stored center controlled by the user.
This acquisition as important for K recording capability to our portfolio and aligns well with our strategy to build out our medical portfolio in high growth markets.
Net exchange as part of an event that family for a little over a month now it would be couldn't be more pleased with the team in the business.
End of July we closed our third acquisitions. This year arduous there's varying over this company develops a manufacturers' intelligent laser scanning subsystems for advanced industrial and medical applications.
Our justice located one hour north of Munich, Germany, and dramatically accelerates, our intelligence subsystem strategy into high growth markets, such as additive manufacturing micro machining and medical applications.
In our Photonics segment.
This acquisition doubles, our engineering capabilities and laser beam steering and that's a phenomenal breadth of proprietary I'd be a no out to our photonics segment.
We see strong sales and technology synergies of applying these capabilities fruit in event that football make sales channels.
Hi. This is there are just a few days ago and I'm very excited by the strong funnel, but your niche opportunities, which we will which will materially contribute to our growth in 2020 and beyond.
For me I've been a pipeline perspective, we see strong and increasing activity vault, we remain very disciplined on strategic fit and returns we will move quickly if an opportunity arises that we few accelerates our strategy.
Now, let me touch on what we're seeing in our markets and the overall macro economic climate.
Our medical markets continue to be very robust, we saw double digit growth in our medical businesses in the second quarter and expect that momentum to continue for the full year of 2019.
Momentum is broad based but we are particularly pleased with our momentum in robotic and minimally invasive surgery.
Well that is gaining share in these markets driven by innovations.
We announced a new integrated or product with a large medical customer.
Expanded into multiple new robotic surgery platforms with multiple technologies and see tremendous momentum with our latest and its a flatter products with smoke evacuation functionality.
I would also like to point out that we're achieving double digit growth in their medical businesses. Despite a double digit year over year decline in DNA sequencing.
Representing over 50% of our revenue, we expect our medical business to serve as a growth engine in 2019.
In an uncertain macro economic climate.
We saw further de accelerating momentum in industrial capital spending climate in the second quarter consistent with the lowest PMI indices since 2012 for most geographies.
Yeah, certainly if we reported on in our last earnings call has turned into a more broad based softening in our advanced industrial markets in the latter part of the second quarter.
With customers has it them to place orders. This is purely a macroeconomic phenomenal as were actually gaining share in this stuff in our environment.
We also feel this is temporary as we see strengthening bookings bookings for the fourth quarter.
Slowing bookings for the third quarter were particularly felt in our photonics and precision motion segments.
Mark Currie electronics, and semiconductor markets further deteriorated through declines of 25% to 30%.
We expect these markets to bottom in that second half with a modest uptick in 2020.
As a reminder, temporary kind of event. This revenue is exposed to market electronics.
And strategically we aim to reduce our exposure to democracy, that's what makes markets further organically and through M&A.
Geographically the trade wars, with China, and the resulting customer uncertainty were particularly felt in the Asia Pacific region to region and Germany.
Our revenue to China year to date declined by 10% where growth in medical sales was more than offset by micro electronics and industrial materials processing market declines in our photonics segment.
As a reminder, our China exposure is 10% of overall novanta revenue and while <unk> microelectronics and China contributions are relatively modest.
Declines are meaningful enough to have an impact at an event the level for year over year comparisons.
Our teams did a tremendous job in Europe growing in a declining industrial market environment.
While we are technically trimming manufacturing cost and weak area, but we do see this weakness is temporary or not waving in our wavering in our conviction.
Okay innovation and growth investments to expand our proprietary technology positions through the business cycle.
As a matter of fact, we feel we're very well positioned that see an opportunity to gain share through the cycle.
Now, let me turn to our operating segments, starting with the vision setting this time, because again the absolute growth starting this quarter with strong momentum.
Carrying into the rest of the year as a reminder, the vision segment predominantly serves the medical market.
Large replicate applications include minimally invasive surgery in future diagnostics and hotter in medical devices.
For the second quarter, our vision segment delivered excellent 22% year over year revenue growth growth continued to be driven by new products and new product launches at customers.
Individually segment, new product revenue year to date grew over 75% versus last year. This islands increased 60% and total new product revenue increased to about 35% of sales year to date.
The book to Bill in our vision second was 0.94, mainly due to order timing.
The vision segment predominantly serves the medical market and as previously mentioned, we see solid market momentum as well as new product launch momentum, which we expect to come to you as we progress through 2019.
Our won business performed extremely well in the second quarter of 2019, continuing its momentum from the last few quarters, we couldn't be more pleased with the innovation strengthening customer relationships depth of this business.
The long team did a superb job of keeping up with the tremendous demand for most of their one of their new product innovations. The from 300 instead of later with integrated smoke evacuation.
Surgical smoke is a dangerous byproduct of the vapor ization of tissue with energy based devices during approximately 95% of all surgical procedures.
Inhaling to smoke equates with smoking 20, 227 cigarettes per day.
Worldwide and in the U.S. laws are being passed or pending requiring smoke evacuation devices.
For example, also being passed in Canada, the UK, Australia that Merck and in Colorado in Rhode Island, and the U.S. with Massachusetts, and California pending.
Our from 300 answer fighter product innovation integrate smoke filtering and evacuation friction out of the Indians for flavor.
Optimizing workflow and not requiring a separate smoke evacuation box.
Our loan business is uniquely positioned to capitalize on this market opportunity, which we believe represents a market growth of 20% per year.
Finally, well, but then I just visited the VAM facilities and we are extremely excited about the overall business in innovation opportunity funnel.
Of warm into broader minimally invasive surgery and robotic surgery markets.
Moving on we are very pleased with the continued momentum over NDS product line in the second quarter. Andy has delivered its 10th consecutive quarter of year over year core revenue growth driven by new products, such as poor K displays.
Wireless products and our new video image management.
An acquisition product or VMM rich addresses the integrated operating room market.
In addition, the NDS business substantially improved its profitability.
As mentioned earlier domestic stands acquisition superbly fits from a technology and a customer complementarity perspective.
And we feel we'll refer to improve our position in the integrated into our market.
Finally, our detection and analysis business continues to show solid momentum around new product launches of medical grade or have idea machine vision product offerings.
In the second quarter of 2019, the business continues to see strong double digit growth in its RF idea machine vision revenue, while expanding its product offerings with three new RF I'd product introductions to date.
With five expected in total for the full year.
Our precision motion segment revenue declined 5% year over year in the second quarter were fantastic growth momentum and robotic surgery could not offset steep declines in microelectronics and semiconductors.
Because they continue to like our position in precise ended Mendyk motion control technologies, serving multiple markets with structured growth dynamics, such as precision automation robotics metrology and robotic surgery markets.
We never remained focused on our strategy and investor gained share in these markets to innovation and M&A as we are excited about the mid and long term potential in this segment.
Within the precision motion segment year to date, new product revenue grew over 75% and our design wins grew more than 45% versus last year as we bring new innovations to market and are expanding our commercial teams.
The precision motion book to Bill was 0.84 in the second quarter due to the microwave electronics and industrial market softness that we mentioned earlier.
Party upset offset by strong momentum in robotic surgery.
As stated before we are excited about Ingenio acquisition, which that's a critical motion control capability that now allows us to offer intelligence subsystem solutions to our customers.
Turning to the performance of our Photonics segment revenue was down 9% driven by laser quantum ended deteriorating industrial capital spending environment.
Laser quantum revenue in the second quarter declined double digit year over year as expected due to the dynamics in DNA sequencing, we widely reported on the last few quarters.
As we look at the second half of the extends of Brexit risk mitigation through safety stock bar customer in DNA sequencing was more pronounced I mean mobile and anticipated.
And DNA sequencing is now expected to be down double digit in the third quarter recovering to flat growth in the fourth quarter.
We believe this short term lumpiness this temporary enough correlated with long term market demand more our competitive position.
We reiterate our excitement about the long term growth prospects of this business as DNA sequencing is still in the very early stages of penetration into clinical applications with numerous numerous positive catalyst on the horizon.
The performance of the Photonics segment was also impacted by some of the macro economic headwinds and industrial capital spending that we just discussed.
And which our Synrad business is particularly sensitive to.
We expect this to be a drag on our growth in the fourth quarter with gradual improvement in the fourth quarter.
The headwinds mens mentioned.
Above temporarily impacted our strategic growth could be eyes in the photonics segment year to date, new product revenue and photonics decline, primarily driven by laser condiments in right.
Design wins also declined mid single digits here today, but we expect this to be temporary as a matter of fact, we have line of sight on strong double digit full year design in growth.
As a few strong design wins were already booked in July .
Overall, we're pleased with the organic revenue growth and profitability that our teams achieved in the second quarter of 2019, and I'm very proud of the agility of our teams in a more uncertain industrial capital spending environment.
To wrap up we feel that I've had is very well positioned in an uncertain macroeconomic environment Ventas leadership position across diversified medical and advanced industrial market combined with our disciplined approach to M&A is providing a solid foundation.
For long term sustainable growth.
Therefore, we remain focused on our strategy to expand and growing medical markets are not wavering in our conviction of innovation investments to expand our proprietary technology positions through the business cycle.
So with that I will turn the call over to Robert to provide more details on our financial performance Robert.
Thank you Matthias and good morning, everyone. We delivered 155.1 million and revenue in the second quarter 2019, and an increase of 3% on a reported basis.
Our acquisitions resulted an increase in revenue of 1.7%.
Points and foreign currency exchange rates adversely impacted our revenue by 3 million or 2%. Consequently, organic growth was 4% year over year.
We are pleased with the performance of our teams and delivering our province revenue guidance in the second quarter, especially after a weak June booking month that coincided with elevated rhetoric around global trade and tariff.
Despite this unexpected delay in bookings, which I should mention we are already seeing some recovery in the third quarter, the strength of our portfolio and our position in the secular growth markets such as medical are very strong counterweight to the challenges and industrial microelectronics markets.
From an end market perspective sales and micro electronic applications were down more than 25% year over year sales into the industrial markets. Excluding the micro electronics was down mid single digit.
And sales in the medical end markets was up close to 20%.
Growth in medical was achieved despite experiencing year over year declines in our DNA sequencing application in laser quantum.
Turning to other financial results second quarter 2019, GAAP gross profit was 65.8 million or 42% of sales. This compares to 65.2 million or 43% of sales in the second quarter of 2018.
On a non-GAAP basis second quarter 2018, adjusted gross profit was 68.4 million or 44% of sales compared to 67.7 million or 45% in the second quarter 2018.
Our gross margins expanded sequentially, albeit at a lower rate than we anticipated after seeing significantly higher growth in our medical consumables business and a temporary pullback in our higher margin precision motion for tonic sales to the advanced industrial markets.
In addition, the double digit growth in our EMEA segment has taken significant effort and resources to ensure we do not disappoint our customers.
This has caused us to shift resources in the quarter to meet this demand away from production transfer initiatives, namely the closure of our San Jose manufacturing facility.
This in turn has delayed that production move to midway through the fourth quarter of 2019, and therefore is expected to result in redundant cost structures in the second half.
That being said mid Tyson I just finished the visit of our new production lines in Germany and could not be more pleased with how well the team has prepared for production and how well they structure the manufacturing lines to deliver volume production at lower costs.
Consequently, we are truly looking forward to wrapping production in this facility.
Second quarter, R&D expense was 13.4 million or 9% of sales compared to 12.6 million or 8% of sales in the second quarter 2018.
We cannot be more pleased with our investments in R&D and our ability to accelerate our innovation engine.
In addition to our organic investments over the last three acquisitions in 2019 brought with them significant technology and engineering talent furthering our ability to serve our customers and capitalize on the emerging intelligent subsystem opportunities.
Despite the third quarter challenges you should expect us to protect our investments in innovation and take advantage of the environment that strengthen our competitive positions.
Actually in expenses in the second quarter was 29 million or 19% of sales, which was flat to the prior year slightly improved as a percent of sales.
GAAP operating income was $15 million in the second quarter 2019, compared to 17 million in 2018, whereas non-GAAP operating income was $25.8 million or 17% of sales, which is roughly flat to the prior year on a dollar and percentage basis.
Adjusted EBITDA was $31 million in the second quarter 2018, as compared to $30 million in the second quarter of 2018 interest expense in the quarter was 2.2 million versus 2.6.
In the prior year, the weighted average interest rate on our senior credit facility was 3.5%.
On the tax front, our GAAP tax rate was 19.5% for the second quarter of 2019 is different from the Canadian statutory rate of 29% driven largely by jurisdictional mix of income.
On a non-GAAP basis, our tax rate for the second quarter 2019, with 18.3% mostly in line with the full year expectations of 17.5%.
Our GAAP diluted earnings per share was 29 cents in the second quarter 2019 compared to diluted earnings per share of 32 cents in the second quarter 2018 on a non-GAAP basis adjusted earnings per share was 54 cents in the quarter.
From 51 cents in the prior year.
We ended the second quarter of 2019 with 35.5 million diluted weighted average shares outstanding which is flat to 2018.
Second quarter operating cash flows 15.4 million compared to $20 million in the second quarter 2018. Despite the fact that cash flow [laughter] financially and free cash flow as a percent of GAAP net income was greater than 100%. We were disappointed overall net working capital was 24% of sales driven by an increase of inventory to a 115 days outstanding the increase in days was driven by the redundant manufacturing facilities.
And by the delay in bookings in June as we look in the second half we are focused on driving down our inventories to improve our cash flows.
We ended the second quarter of 2019 with gross debt of 216 million and our gross leverage ratio was 1.7 times defined as gross debt divided by Rolling 12 month pro forma EBITDA. Our net debt was 150 million as of the end of the second quarter 2019, or roughly 1.2 times.
Finally, our balance sheet is strong with ample acquisition capacity. We are excited about three transactions that we recently closed a see them as strong contributors to our growth in 2020 and beyond.
In addition, despite the recent acquisition activity as we continue to build a very healthy acquisition pipeline, particularly around the medical end markets. You should continue to expect us to be disciplined about maximizing cash flow returns and ensuring future transactions will accelerate our strategic and financial goals.
Turning to guidance given the market dynamics that we have discussed we think it would be meaningful to provide guidance for both the third quarter and the fourth quarter.
19.
As Matthias mentioned previously our third quarter impacted by a temporary softness in shipments to a large laser quantum customers, which will recover in the fourth quarter.
And from a temporary slowdown in June bookings caused by the global trade uncertainties impacting the industrial capital equipment.
Our bookings are already recovering in the third quarter positioning us for a stronger fourth quarter.
For the third quarter of 2019, we expect GAAP revenue in the range of 154 million to 156 million down four to three 4% to 3% on a reported basis.
Adjusted gross margins are expected to be around 45%.
R&D expenses for the third quarter 2019 will remain around 9% of sales and M&A expenses in the third quarter expected to be around 19% of sales.
Depreciation expense, which was about $3 million in the second quarter 2019 will be similar to third quarter amortization expense, which was $6 million in the second quarter will be about $7 million in the third quarter.
Stock compensation expense, which was around $2 million in the second quarter of 2019 will be similar in the third quarter.
Interest expense that third quarter is expected to be between $2.3 million and 2.4 million following the closure of the arduous acquisition.
We expect to see a non-GAAP tax rate of 20% in the third quarter.
For adjusted EBITDA, We expect the range of 29 million to 31 million.
Finally, we expect adjusted EPS to be in the range of 50 cents to 52 cents compared to 61 cents a third quarter of 2018.
Diluted weighted average shares outstanding should be around 35.6.
Yes.
Moving on to the fourth quarter of 2019, we expect GAAP revenue in the range of 166 million to $169 million up 6% to 8% on a reported basis.
Adjusted gross margins are again expected to be north of 45%.
R&D expenses for the fourth quarter 2018 will remain around 9% of sales and Thats DNA expenses, the fourth quarter expect to fall below 19% of sales given the uptick in revenue.
Depreciation amortization and stock compensation expense will be at the same levels in the fourth quarter as they will be in the third quarter.
Interest expense in the fourth quarters to be in line with the third quarter absent a significant debt pay down.
We expect to see a non-GAAP tax rate of just over 20% in the fourth quarter.
We expect fourth quarter 2019, adjusted EBITDA to be in the range of 34 million to 36 million with a current view that we're trending towards the upper end of the range.
Finally, we expect fourth quarter 2019, adjusted diluted earnings per share to be in a range of 61 cents to 63 cents.
Diluted weighted average shares outstanding to be around 35.6 million as always our guidance does not assume any significant impacts of foreign exchange rate changes.
While the Lumpiness in the second quarter second half results with unexpected and caused by macro events unrelated to our competitive positions, we feel confident in the ability and the strength of our portfolio to mitigate the lumpiness going forward.
As we stand here today, we continue to build momentum for a stronger fourth quarter, we're seeing stronger backlog our medical business is continuing its strong growth trajectory and we are expecting sequentially improving shipments to our DNA sequencing applications.
Our design win activity and new product introductions are accelerating in the second half, giving us confidence as we exit the year with strong momentum and are positioned well to deliver on our 2020 financial goals.
And the acquisition activity completed thus far in 2019 further cements this view.
Finally, we strongly believe the investments will continue to make in R&D are driving further innovation and growth opportunities. We are pleased with our position and medical end markets, which is giving our portfolio resilience and helping us have weathered a difficult industrial environment. We're very proud of the performance of our employees as evident in the second quarter's performance and looking forward to continuing to deliver on our commitments to our employees our customers and our shareholders.
This coincide this concludes our prepared remarks, we are now open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
The first question is from Lee Jagoda with CJ Securities. Please go ahead.
Hi, good morning.
And finally I'm starting on your gross margin, obviously, you called out the redundant costs and the delay in moving the San Jose facility as one of the impacts to gross margin this year.
So, we probably don't get to that 100 basis points or so of improvement.
That we previously talked about that being said as you look out to 2020.
What are the things that kind of gives you confidence in the gross margin expansion, there and should we see the catch up from the redundant costs going away plus incremental activities in 2020.
Yes, Thats, what we hope for so I think you know the the San Jose manufacturing facility. We're running full production and were also got the redundant costs in Germany right. Now. So you know that overall closure plan is just south of $2 million worth of savings that we would have a pretty good impact on our gross margin.
Into 2020, and then the teams are actually making some great progress on the productivity programs that we have across each of the individual manufacturing sites as well as our overall growth system. So there is some good progress on combining there.
Okay, and then just switching gears to the laser quantum lumpiness, if I look at the Q4 guidance does that imply a catch up or just sort of a return to more normal growth in that product line in Q4, and then beyond Q4, how should we think about growth in that product line given the relatively easy comps they were up against in the first half of 2019.
Yeah. So to answer your first question is multifamily we expect them to return to a more normal patterns in Q4 and <unk>.
I will just as a reminder, I mean this is the capital equipment part of the business not the consumable part and the capital equipment heart.
Can be more lumpy from quarter to quarter perspective, so and long term and if you look kind of.
Over multiple years that this is an absolute growth engine and in any particular quarter it could be a lumpy.
So from our perspective, we expect this business to return to more normal, let's say, particularly in the second half of 2020.
And yes, we're in close contact with our customer on this.
Okay, just one more on the acquisitions that you talked about earlier in the call understanding that they're all pretty low revenue contributors at the moment, although I assume we expect them to be nicely additive to organic growth going forward can you talk about sort of the margin structure of each of those as it relates to their segment average margins. So when they start to grow you know what should we see margins doing there.
Yeah, I would say from a gross margin perspective, there, they're all a little bit north of where our existing businesses are.
And so there should be additive from that manufacturing from that perspective, I log into kind of the specifics around that but given the GE acquisition is really.
Hardware software in a box and the largest acquisition is really similar to that.
They do come with better gross margin profile.
I you know overall those businesses will be contributors organic growth and 20 flooded we're pretty excited about that specifically.
The artisan energy acquisitions should be seeing above average growth rate in relation to our overall portfolio.
Yeah, and all of them are about unique technology capability with proprietary IP that we can help to accelerate.
And on growing through dinner event sales channels right. So it's a very similar.
Kind of way of driving synergies.
Sounds great I'll hop back in.
Yep. Thanks.
The next question is from Richard Eastman with Baird. Please go ahead.
Oh, yes. Thank you.
Could I just get a a book to bill for the photonics business in the quarter.
Impossible.
[noise] zero point.
Nine.
And that's off a very weak laser quantum number and.
And I will just say an average.
And the rest of the business number right and the weak laser quantum number is linked to the DNA sequencing pause for the third quarter that we comment on them.
Yep Yep.
You see in is that also the reference to the in vitro diagnostics customer yeah.
Yeah, Okay, Okay, and lets say the end user.
And then maybe Robert you fight.
Look at the second half revenue guide.
I'm kind of coming up with something like a 16 at the midpoint. So the guys maybe 16 to as much as 20 million of revenue kind of slip out of the second half.
And I'm trying to just maybe a portion that by by the segments is that.
Primarily in the.
Precision motion is that more industrial slippage of revenue or.
And the majority of that actually comes in the third quarter. So I'm thinking maybe that is around the photonics business.
Yeah, it's almost as if the third quarter took other.
There's a pause in the year so within for topics you know it will be impacted by double digit declines in laser quantum in the third quarter and then a generally has been weak industrial capital spending. So we expect that to be down about mid single digit in the third quarter. Our precision motion segment will be down about 15% to 20% in the quarter and that hit hard by the microelectronics downturn and the broader industrial capital spending market.
Our medical sales in that segment are up double digit.
The decline in microelectronics is more than offsetting it and then our vision segment is expected to be up low double digit again in the third quarter as we get to the fourth quarter than you see photonics returns to growth.
Vision continues its double digit growth and precision motion will stabilize the flat.
So that's how it kind of unfold.
Okay, Okay fair enough and then maybe maybe just around the.
The EBITDA decline, maybe he around 11 million.
Again the EBITDA.
For the guide for the full year declines by about 11 million again at the midpoint and.
My thought as we went to 16 million decline in sales you say is that a mix issue or is that again go back to.
You know the the capacity that maybe doesn't.
Get eliminated until late in the year [laughter] worsened negative leverage there.
Yes, all of the above so.
Definitely there is a mix impact there when you're losing.
Precision motion and Photonics revenue as you think about where we're losing in photonics is an intelligent sub system.
Platform and the laser quantum segment.
So you're losing some very high margin business, but you are losing at also at a time, where you know its it was a more of a sudden drop in bookings and so you couldn't adjust your manufacturing cost structure.
Quickly enough to adjust for that and then simultaneously or a middle of a production move and so you're dealing with the redundant costs there and so as you exit the year, what we were thinking more were trending on the upper end of that EBITDA range.
Exiting the year and then you're getting the benefit going into 2020 of eliminating that redundant cost structure, and then recovery to really kind of a more of a stable profile and the laser quantum business you get a better mix effect going into 2020 as well as eliminating some of the manufacturing costs.
So the combination of things like really kind of puts us back on track in 2020 and mix Q3, an anomaly.
And I would say rake of course, you will we didn't do or we're not going to do is pull back our innovation investments right. So we're just looking at this Q3 kind of did a pause.
Well OK due to him as an Lenny right, where we see a tremendous opportunity of customers in meeting our innovation. So we're basically doubling down on on the innovation and we're maintaining that innovation spent a fixed as you. So we're not adjusting for that so thats, maybe at or kind of detail that I guess.
Yeah Yeah.
Okay and then just it's just my last last question here in the in the precision motion segment again, given the your comments Robert around maybe the growth rate there or lack of in the third and flattish in the fourth.
Oh, well, we'd be able to make any progress on the on the second half gross margin there in the first half was a little over 44%.
Second half without any real revenue driver there.
It feels like that that might be flattish as well in the second half.
First the first.
Yes, I think well obviously it will be challenged in Q3, I think Q4 gross margins will be higher.
And where they were in Q2, so I do think you'll get you'll get a little bit of an uptick there as you go from Q2 to Q4 Q3 is just.
You cannot just for quickly enough yeah, yeah short term manufacturing absorption challenges right, but a bit in Q4, we can kind of optimized for that much better.
Yes, yes, and then in your comfort level tie us around the industrial business in the fourth quarter.
Where does that come from.
You said, we've seen better bookings maybe in in July in early August .
But I'm just curious do you have line of sight and do you have a high confidence level around the industrial piece of the business in the fourth quarter.
Yeah, well first of all I think the overall fourth quarter, why we feel so sequentially I going to be better than the third quarter is of course and because multiple dynamics. One is the units you can sing up secondly, medical continued to perform well third is new product introductions.
Also in photonics.
And fourth actually existing backlog that actually is building very strongly in the fourth quarter as well. So all these things give us give us confidence, but it's not only kind of we're not betting on a massive industrial market recovery or something if thats, what youre alluding to.
We are really looking at what the customers are telling us and actually it continued strength in medical with a sequential uptick in DNA sequencing generic let me just clarify I do Dymatize. This point. The you know the second half Theres no real change in our view and the microelectronics as an industrial markets. We think Q3 and Q4 look very similar and in a general sense. Its just portions of our business are actually going the other way, which help us.
Okay, Okay understood alright, thank you.
Thank you Mike.
The next question is from Brian Drab with William Blair. Please go ahead.
Hi, good morning, Thanks for taking my questions.
The first one just did you give the total book to Bill.
Oh did you forward it for the second quarter to total book to Bill Bill was 0.90.
Okay.
Let me just make sure its clear so 0.904 for contacts and 0.94 for vision.
In a 0.84 for precision motion the 0.9 for overall company.
And the down is a negative.
Photonics is really all being caused by our laser quantum business.
The vision segments, more just kind of a timing more than anything else. It gives we got double digit growth happening again in the third quarter.
And then in precision motion if it is almost all waiting for the microelectronics.
Okay got it thank you.
Can you share.
Anything in terms of revenue for the three acquisitions that you're talking about so we can sort of model or organic revenue growth.
Yeah. So the first the first in Virginia and met exchange aren't real meaningful contributors you can see that in the reported revenue.
That we broke out its only the relatively small.
The arduous transaction is closer to 20 million annually, we close that at the end of July .
And it's not the most linear type of business, so, yes, but it's around $20 million and so we will see more meaningful contributions from that and 2020 and also because it's not that base business, that's going to be that the big contributor for us in 2020, its really its capabilities that it adds to us allows us to go after.
Some intelligence subsystem platforms that we internally have been struggling to address with our customers.
Yes, it's really about what we're really excited about the arches acquisition, Brian because it gives us a totally new capability.
That includes basically what we've been talking about industry for though I O T type of of capability, including sensors motion data generation in process control and so totally new capability that adds to to our current photonics capability for for current and new customers.
And we doubled the engineering capability. So it will have a positive impact on our innovation rate going forward and you see kind of the importance of innovation in our business and last but not least we feel that this capability helps us to accelerate gaining share in high growth markets like laser additive manufacturing in micromachining and certain medical application. So.
And all these three things strategically are tremendous and strategically.
And I think yeah, we certainly believe and 2020 and beyond as we will have a very positive contribution to to our overall photonics growth.
Okay. So oh. This is this a lumpy is it a lumpy business or seasonal business. When you say, it's not the most linear type of business.
Yeah, it's a little lumpy right now because its based businesses.
His focus on them at more of a project orientation than some of our existing businesses.
So it's got a little bit more lumpiness around it than than we would like in the short term, but you know is actually corrects itself as we get into 2020, yeah at the moment, we kind of start to put this capability and more in the OEM customer channel, we feel that over time this becomes.
Yeah, much more predictable business.
Yes.
Leveraging our capabilities and our customer relationships globally and similar to other acquisitions that we've done right. So.
And but yet design win I mean, you've got a winning design wins and design in cycles are sometimes 18 months right. So said, we'll get more pronounced as time progresses.
As for trends might be a little bit more lumpy than that what you're used from us.
Okay, and then on your guidance implies what organic revenue growth for the third quarter and also for the fourth quarter.
Organically, we'll be down in the third quarter.
Our reported basis were down three or 4% organically.
You know that's a mid single digit.
In the fourth quarter were basically expecting flat organically with you know up mid single digit on a reported basis.
And that that's weighing as you know a little bit of the rate we're already seeing from an orders perspective, you know our our.
[noise] coverage orders coverage for the fourth quarter is higher than where it's been in prior periods of time, so that gives us some confidence there and then the laser quantum business recovers in the fourth quarter not to a growth profile per se, but to buy.
More normalize where we expected it to be before and so the combination of those to drive for that.
Okay got it and then just my last question.
You discussed it a little bit earlier, but the gross margin.
As we look to 2020.
We have these two positive factors I just want to make sure I'm understanding. It correctly, then if you are able to.
Eliminate 2 million in redundant costs related to the San Jose move.
And then.
Maybe you can give an update secondly on what what is happening.
Yeah, just in the <unk> with productivity initiatives and within the factory.
And then you know I guess those are the those are just a couple of main main things, but is there anything else that's driving gross margin expansion in 2020 and could that could that be a year, where you got.
Hundred and 50 basis points.
Yeah, Yeah, Yeah, moving there there's margin yeah, there's more multiple what we call value drivers that we're attacking right. So first of all whats and material productivity largest chunk of our costs as materials, so driving material productivity either by consolidating supply at the group level, Yeah, where we have actually a centralized team working adds or whatever its BCBS or cables or machine parts that a majority of our businesses are using.
So that's a process, that's well underway and we feel a high and a serious impact in 2020.
And then secondly, the impact of yeah, consolidating in manufacturing competency centers of which you will.
You've heard that from the first impact, but we feel we have multiple other drivers on the way third is yeah basically value engineering and.
Medscape process that and taking cost out of our products through engineering approach.
So so these these three add drivers we feel are meaningful they're backed up with a funnel of opportunities per business and for the group.
And they're lining up nicely for 2020 impact yet so we do feel.
Yeah determined and confident about continuous expansion in that.
2020, and beyond based on structural.
Approaches.
And I guess, just one last piece that to that is it can you talk about it you know the timing of a margin benefit from a change in.
Location or structure of your Juan.
Manufacturing.
We talked about that I mean, its or even the did the impact on the Maya segment or I mean are we a flight $2 million of about optimizing the cost of.
Yeah, some pieces of that and that manufacturing.
Well, if you referred to and manufacturing footprint consolidation I mean that all has the vision segment, if you're referring more to the.
Optimizing putting more volume through the existing manufacturing facility to drive additional overhead leverage from the medical consumables business.
That we haven't quantified the big impact of that I would say you know you ask the question early on you know could 2020 be a period of time, where gross margins expand.
More than 100 basis points I think the answer to that is yes, you know is.
If there are enough actions there that can lead to a better 2020 outcome.
100 to 150 basis points is not out of the norm.
So it's really to us as you know we've got a third quarter here does disruption that you know we recover that.
Im talking about as we get into the fourth quarter and then we're on a stronger trajectory going into 2020.
It looks a little bit higher than normal, but thats really just the factor that we have to the quarter offer on but for purposes.
Got it okay. Thank you.
The next question is a follow up from a lead jacket, though with CJ AFS Securities. Please go ahead.
Hey, just wanted more.
Regarding tariffs I know in the past you've kind of talked about you've done a really good job mitigating the impact from the first two tranches is there anything on this next list for that could be problematic and you know what are your thoughts on trying to mitigate that as well.
Well there is no impact on this next tranche.
In terms of the absolute in Paris spends itself, it's really hitting consumer products and.
Things unrelated to us yes.
So we don't really what is the one of the things I want to make sure that there is a distinction over is that the tariff.
Rhetoric and disruption that we experience in June .
Coincided more with.
Some of the rhetoric with you and Mexico specifically.
More so than China.
And so what really caused manufacturing facilities or our customers customers that do is rethink their overall supply chain initiatives that deal with them with a more uncertain warm.
So as we're looking into the recent activity that's coming out.
Obviously too early to get a real good read on it.
But it's fair to us it's more of the same you know I don't I don't think China is something that we're anticipating as being resolved in any sort of short term here and its something that were planning as acting in a norm weve mitigated most of the tariff impact at this point don't expect a material impact from an expense perspective.
But we do think that in the second half of the year that industrial capital spending is going to continue to be weak as a consequence of this yeah.
For us it's more of a demand issue than it is an expense issue and I think we've been pretty.
Consistent about it and you see that coming back into.
Our demand into China, which which is down particularly on the photonic side right, which is threatened by that so.
So that's the real that's the real watch out right is the recent activity will that through to deteriorate.
Industrial capital spending from the current levels of course, that's hard to say.
Right and yeah. We're fortunate we had from be it the medical part of our portfolio and the innovation part of the portfolio to to counter weight that so that's how we're approaching it.
Great very helpful.
Thank you.
[noise] again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Mr. Matthias Glastra for any closing remarks.
Thank you operator, so to summarize in the second quarter of 2019, Novanta delivered a solid performance in an uncertain macro environment, our focus on accelerating profitable growth and diversity and resilience of our businesses was evident in our strong financial results.
We continue to feel good about the positioning of our businesses around secular macro growth drivers with over half of our revenue a robust medical markets no ventas diversification, a relentless focus on leadership position across a variety of medical and industrial growth market is providing a solid foundation for sustainable profitable growth in today's current macroeconomic backdrop.
We see a long term need for our motion division of photonics critical capabilities and a large variety of applications in the back of micro trends within this industry, Porto precision medicine and health care productivity.
We therefore continue to remain excited about the applications, we play in and the positions we have and continue to invest in long term organic growth innovation and M&A.
In closing I would like to thank our customers our employees and our shareholders for their ongoing support on particularly thankful for the strong contribution and execution of our teams have committed novanta employees that are showing tremendous dedication and agility.
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 third quarter 2019 earnings call. Thank you very much this call's knowledge or.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.