Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta 2021 Third Quarter Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead.

Thank you very much. Good morning, and welcome to Novanta's Third Quarter 2021 Earnings Conference Call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is our Chairperson and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley. If you have not received a copy of our earnings press release issued today, you may obtain it from the Investor Relations section of our website at www.novanta.com. Please note, this call is being webcast live and will be archived on our website shortly after the call. Before we begin, we need to remind everyone of the safe harbor for forward-looking statements that we've outlined in our earnings press release issued earlier today and also those in our SEC filings. We may make some comments today, both in our prepared remarks and in our responses to questions that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of this time. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of these forward-looking statements as representing our views as of any time after this call. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the Investor Relations section of our website after this call. I'm now pleased to introduce the Chairperson and Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered another exceptional quarter. In the third quarter of 2021, we delivered above our expectations for revenue, bookings and profit. We again hit new all-time highs for revenue and bookings with excellent operating performance. And in addition, we were very pleased to close the ATI acquisition and the newly rebranded IMS acquisition in the quarter, both of which exceeded our expectations for the third quarter. Those two businesses are a great strategic fit for Novanta, and we are excited to have their teams and product offerings as part of the Novanta family. Speaking in more detail through our third quarter results, our company delivered approximately $178 million in revenue, representing 24% year-over-year revenue growth on a reported basis and 15% growth on an organic basis. This is the highest ever single quarter sales for Novanta due to exceptional execution by our teams hence the contribution of our new acquisitions in a difficult environment. In addition, in the third quarter, we had an excellent operating performance with adjusted EBITDA of $40 million, which is up 34% year-over-year. This represents an EBITDA margin of nearly 23% of sales, which is up 160 basis points year-over-year. We are extremely pleased with and proud of how our teams drove exceptional operating performance using the Novanta growth system tools despite widely reported supply chain challenges, which I'll speak to in a moment. Adjusted diluted earnings per share was $0.75, which is up 79% versus 2020. So all-in-all, very strong results. We saw another quarter of record-breaking bookings in the third quarter with sequential bookings growth of 2% versus a very strong second quarter and year-over-year bookings growth of 84% versus the third quarter of 2020. We saw strong demand across all our…

Thank you, Matthijs, and good morning, everyone. Matthijs discussed our revenue, so I'll start today by giving some additional details about the company results. Our third quarter non-GAAP adjusted gross profit was $80.3 million or 45% adjusted gross margin compared to $61.9 million or 43% adjusted gross margin in the third quarter of 2020. In the third quarter, adjusted gross margins increased 190 basis points year-over-year. The strong results comes as a result of ongoing work from our operating teams to drive the Novanta growth system deeper in our day-to-day work, allowing the factories to better leverage their costs and drive productivity. This improvement came in spite of the significant supply chain challenges and unexpected factory disruption in our Taunton optics facility, which resulted in a production stoppage. In relation to the Taunton facility, we have an aging infrastructure issue that caused our production in that facility to go down in the quarter. We have estimated the costs associated with this disruption at approximately 100 basis points to the overall Novanta gross margins. While production is now back up and running, we continue to expect to experience some additional costs impacting us in the fourth quarter. However, as we mentioned in the prior calls, we have made a more than $10 million capital investment in our new Taunton production facility. The keys to that facility were handed over to us last week. And we are preparing for a phased production move, which is expected to be completed by the end of the second quarter. In the meantime, we continue to make significant improvements in our existing production processes to minimize and mitigate future disruptions. In addition to the Taunton disruption and similar to other -- what other companies are reporting, we continue to experience disruptions in our supply chain. The…

[Operator Instructions]. And our first question comes from Lee Jagoda of CJS Securities.

So I just want to focus in on the Photonics segment for starters. And I think in the prepared remarks, you said that the impact of the facility issue was mid-single digit in total for the company. Was that mid-single digit percentage of sales or single digit millions of dollars? And I guess the follow-up to that would be, in terms of the margin guidance you gave for the Photonics segment, assuming we're up and running, what are the other issues impacting the margin there, if anything?

Sure. Let me break that into two questions. So the comment on the impact to revenue to overall Novanta related to not only the Taunton facility production line down, but also the supply chain challenges and shortages that we're seeing. So I combine the two issues, because there really the Taunton facility only supplies internally for us, and so we consider that as part of the overall supply chain shortages. So the impact to organic growth was somewhere in the mid-single-digit range on a percent basis. So take that in that 4% to 7% type of territory. And that's a high number, I would say. It's a step-up from the second quarter. We're expecting something very similar to that in the fourth quarter. Your second question on gross margins. The gross margins in Photonics will effectively be flat from the third quarter to the fourth quarter. We don't have the line down event in the fourth quarter. But what we do have happening in the fourth quarter is the higher expense associated with keeping the production running. And then the second is that we now have the new Taunton facility done yet empty. And so we're carrying the redundant cost of that new facility or the old facilities, depending upon how you want to look at it into the fourth quarter. So that's going to take a few quarters in order to phase the production in without causing any sort of revenue disruptions. So while we pick up revenue, and you'll see revenue pick up in the Photonics segment, pretty substantially on a -- not only a year-over-year basis, but on a sequential basis, it doesn't correspond necessary to margin expansion because we're carrying that extra cost.

And once we get past Q2 of 2022...

That will help us pick up gross margin.

Yes. I would say -- so the old facility coming off line, coupled with the new facility coming online, versus what the business did before sort of in that high 40s range. Is it additive to gross margin there in the back half of '22?

It would effectively bring the gross margins back up to what we experienced in the first half of the year. That's not -- that's ignoring any kind of expansion that you'd get with volume, but it would effectively bring things back up in there. The new Taunton facility wasn't meant for margin expansion as much as it was to meet the demands and volume.

Got it. And then just shifting gears to the acquisitions, obviously, ahead of plan so far, which is great. If we think about those two acquisitions and their organic growth once things ramp under your ownership, versus the organic growth that you would have expected from the legacy core business, is it same, faster or slower?

Yes. Lee, this is Matthijs. So I think what we've commented on in the past is that we expect these businesses to grow mid- to high single digits, particularly the ATI business is, of course, benefiting from a post-pandemic tailwind of investments in robotics and automation. And that expands into general industry, but of course, also surgical robotics as well as electric vehicle production that, as we all know, is ramping very aggressively. So all these robots or automation solutions need the solutions of ATI and therefore, we expect ATI to show some very strong growth in the next coming years. And I would say the other acquisition, IMS is predominantly in the lab automation and general automation space. So the lab automation is probably a mid-single-digit-ish growth. So overall, we expect both acquisitions to strongly contribute to our growth profile.

[Operator Instructions]. And our next question will come from Brian Drab of William Blair.

The gross margin -- I just want to be clear on this. Robert, you said the cost of the factory being down, I think it was 100 basis points headwind in the third quarter. There's obviously a lot of other things going on. I just want to understand if you total up everything that was -- that you think of as temporary in the third quarter in terms of headwind to gross margin, what was the aggregate headwind?

Yes. So the reason why we kind of focused on the Taunton facility predominantly is because that was truly like a surprise temporary issue in nature. So the margin would have been a little above 46% overall for Novanta had that not occurred. The supply chain disruptions, we haven't characterized them as short term temporary, right? They've been something that we -- I think we've been very clear that we'll stay with us not only through the remainder of 2021, but into 2022, and is not expected to subside, at least in our forecast until at least the back half of the year. So that, I wouldn't characterize as necessarily a temporary impact. It is having less of an impact on margin, more of an impact on just deliveries themselves. We would be delivering higher revenue growth than, frankly, the 15% organic growth that we're reported in the third quarter and we had more supply of products. And you can see that the book-to-bill remains strong in the third quarter. It will again remain strong in the fourth quarter. And so it's really about fulfilling customer demand. At this point, we're going to exit 2021 with the highest level of backlog that we've ever had. And so that firms up commitments as we -- and production schedules for 2022, but we have to be cognizant that that's a consequence of not having all the material on hand and not delivering completely to customers' expectations.

Got it. Okay. And I'm sorry if you made some specific comments here that I missed. But can you just talk about the DNA sequencing business, the Laser Quantum business, and that, over the last couple of years has been somewhat choppy. And I'm just wondering as you -- I mean, obviously, the underlying theme is still very positive. Just as you're looking in the fourth quarter and into 2022, it seems like some of the major customers and that -- players in that business are growing very nicely. But how do you see your business. Is there some catch-up that needs to happen still in that business? Or are you going to grow with the industry? How does that dynamic play out as we go through the next several quarters?

Yes. Thanks, Brian. So this is Matthijs. Yes, we commented in our prepared remarks that the DNA sequencing is catching up to pre-pandemic levels with a very healthy outread and outlook for the full year. And in the third quarter, it doubled year-over-year in terms of revenues. And the drivers underneath are, of course, yes, there's a reopening of the research lab. So that is catching up demand, basically. And of course, in addition, is the sequencing of the COVID variants, right? And that's more driving near-term momentum, I would say. But more structural and I think long term, which is very encouraging, is that oncology testing is becoming the standard of care in therapy/with DNA sequencing. So you see DNA sequencing starting to be to get more into clinical applications. So moving from research to clinical, which is what we've always commented on. And that transition is gradual but pronounced. And so if you look in terms of our guide for fourth quarter, which is including this positive momentum, we expect 2022 to be a positive year. And despite all this, I think the penetration of DNA sequencing is still fairly low, right? So we remain, long term, very positive about DNA sequencing but you sometimes see some short-term choppiness because of individual quarter or customer dynamics. But again, long term, we see increasingly encouraging drivers there. And so -- and then in terms of last year where basically our sales was a bit decoupled from the sales to our main customers I think, right now, we've caught that up. So basically, the selling out, what you see in the market, more and more aligns with our revenue. Yes, so we'll just sell as much as our customer sales basically. So hopefully, that's helpful context.

Yes. Yes. Super helpful. And can I just ask too, as you're talking to your customers and the -- thinking of your vision customers in the surgical market, you mentioned 90% -- they were back to like 90% of pre-pandemic levels. What are they planning for? Do you have a sense of what they're planning for, for 2022 in terms of where that goes relative to pre-pandemic? Is this expectation that we're going to get back to pre-pandemic and above that in '22?

Yes. I mean, that's what they publicly are commenting on. So that actually -- so Q3 was kind of a pullback a little bit as a result of the Delta variant in the third quarter, particularly in the U.S., but people have publicly commented or these customers have publicly commented that the fourth quarter and beyond, we'll see sequential growth as hospitals continue to get better in dealing with both COVID cases and helping other patients. And so we commented in our prepared remarks that we see a gradual recovery. I mean, long term, there's a tremendous backlog of patients that need to be helped. And therefore, that backlog will have to get addressed and that will drive additional investments. So we are, again, very positive about the mid- to long-term outlook in this part of the business. Short term, there might be some choppiness for all the reasons that we know. But again, we're managing the business for the mid and the long term. And we're winning business. We're winning content in this growing application. And so yes, we couldn't be more excited than we're actually adding investments as a result.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks. .

Thank you, operator. So to summarize, Novanta's performance in the third quarter of 2021 was superb. We had all-time highs for sales and bookings, and we beat our own expectations for profit. We closed the two new acquisitions, which are performing very well, with strong engagement from the local teams. We saw another quarter of fantastic growth in design wins and our innovation programs are healthy and progressing despite some minor delays. And all of this came in despite remarkable disruptions in supply chain and logistics, which our teams are fighting hard to manage every day. We're excited to see the continued strength and recovery in the global economy in the advanced industrial sector and also in the medical sector, and Novanta is just very well positioned in these sectors with diversified exposure to long-term secular macro trends in robotics and automation, precision medicine, minimally invasive surgery and Industry 4.0. And in closing, I would like to thank again our customers, our employees and our shareholders for their ongoing support. I'm very grateful for a dedication and strong contribution of our teams of committed Novanta employees, particularly our supply chain and operations teams, who are working so hard to successfully mitigating shortages. And we appreciate your interest in the company and your participation in today's call, and I very much look forward to joining all of you in several months on our fourth quarter and full year 2021 earnings call. Thank you very much. This call is now adjourned.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.