Good morning. My name is Gary, and I will be your conference today. At this time, I would like to welcome everyone to the Novanta Inc.'s fourth quarter and full year 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. 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 fourth quarter and full year 2024 earnings conference call. This is Ray Nash, corporate finance leader for Novanta. With me on today's call is our chair 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 we've outlined in our earnings press release issued earlier today and also those in our SEC filings. We may make some comments today both in our prepared remarks and in our responses to questions that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of this time. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of these forward-looking statements as representing our views as of any time after this call. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the investor relations section of our website after this call. I'm now pleased to introduce the chair and chief executive officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta achieved solid financial results in 2024, effectively navigating a challenging environment. In the fourth quarter, we returned to organic growth as expected, we beat expectations for profit, and we achieved our best quarterly cash flow ever. For the full year of 2024, we had strong operating performance despite the choppy market demand, demonstrating strong core gross margin expansion, adjusted EBITDA growth, and record cash flow generation. We launched fifty new products and received initial orders from our customers supporting our new product revenue ramp in 2025. Overall, I'm incredibly proud of Novanta's resilience in managing through this volatile environment to deliver these results. The Novanta business model with diversified exposure to high-growth medical, life science, and advanced industrial markets has proven resilient under multiple geopolitical and market economic scenarios. Our proprietary products and technologies are well-positioned in medical and advanced industry applications with long-term secular tailwinds such as precision manufacturing, robotics and automation, advanced surgery, and precision medicine. We feel that our winning growth strategy, focused on where we play and how we win, combined with the strength of our portfolio and our deployment of the Novanta growth system, is what drives our performance no matter the environment. For the fourth quarter, we achieved $238 million in revenue, which was a 3% organic growth year over year and a 13% reported revenue increase. Our reported revenue would have been $2 million higher if exchange rates had stayed consistent with our fourth quarter guidance. Bookings grew 54% year over year and 5% sequentially, driven by major OEM customers confirming their 2025 new product launches. Adjusted gross margins were 47% with core businesses, which exclude the Motion Solutions acquisition, expanding margins by 125 basis points. Adjusted EBITDA grew 15%…

Thank you. Our fourth quarter 2024 non-GAAP adjusted gross profit was $112 million or a 47% adjusted gross margin compared to $100 million or a 47% adjusted gross margin in the fourth quarter of 2023. Adjusted gross margins were flat year over year, but our core adjusted gross margins, which excluded the impact of the Motion Solutions acquisitions, were up 125 basis points. For the full year of 2024, non-GAAP adjusted gross profit was $442 million or a 47% adjusted gross margin, compared to $413 million or a 47% adjusted gross margin for the full year of 2023. Our gross margin performance was better than expected in the quarter as a result of strong execution by our teams from embracing the Novanta growth system to better manage factory volumes, improve customer on-time performance, and drive cost productivity deep into our supply chains and production processes. For the full year, adjusted gross margins were nearly flat year over year, but core adjusted gross margins were up 120 basis points. For the fourth quarter, R&D expenses were $25 million, and for the full year, R&D expenses were $96 million or approximately 10% of sales. Fourth quarter SG&A expenses were $43 million, and for the full year, $175 million or roughly 18% of sales. Adjusted EBITDA was $52 million in the fourth quarter and a 22% adjusted EBITDA margin versus $45 million in the prior year, demonstrating growth of 15% year over year. For the full year 2024, adjusted EBITDA was approximately $210 million versus $196 million in the prior year. On the tax front, our non-GAAP tax rate in the fourth quarter was 24%. Our tax rate for the full year 2024 was 20% versus 16% in the prior year. Our tax rate increased year over year due to changes in jurisdictional…

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today is from Lee Jagoda with CJS Securities. Please go ahead.

Hi. Good morning.

Hey, Lee.

So I guess just starting with the outlook versus the outlook you gave in November, there were some items that were not in the $50 million of new products, sort of not macro-related, that were expected to be resolved in 2025. And I guess, in particular, the DNA sequencing piece of the equation. Could you comment on the DNA sequencing product lines and the issues that you faced and when we should expect the recovery there? And then if there's anything else like that, that may not explicitly be included in the guidance that could be a positive outside of the macro.

Yeah. Thanks, Lee. Let me try to take this. Well, first off, in the short term, in the DNA sequencing, shipments are more or less normalized again, but obviously, this area has been substantially in the news in life sciences in general. So what has changed, of course, is the funding cuts in the National Institute of Health, which is driving, let's say, research funding, which is actually an important end customer of our customers. Right? So that's a change, and customers are cautious not fully knowing what that environment will bring them. And then, of course, there are some retaliatory responses as a result of tit-for-tat behavior as a result of trade policies that recently just got enacted. All of these elements were, of course, not in our previous call guidance and, to be honest, have substantially changed the volatility and short-term, I would also say, and maybe midterm DNA sequencing headwinds should be considered higher given that some of the elements could be more prolonged in that market. So those are maybe the major drivers of the changes versus the last call.

Okay. And then I guess, looking even further ahead because might as well do that. If I look out to 2026, and I think about what's embedded in your guidance in 2025 in terms of $50 million of new product, I think you've said previously that that $50 million number, because of the timing of the sell-in, should at least be maintained, if not potentially grow over the next couple of years. So if I take that as sort of a baseline, assuming that's correct, and then layer in the macro environment either stabilizing or potentially improving, all of that to say, like, should we see accelerating organic growth in 2026 versus 2025 sitting here today?

Yeah. I mean, we remain very confident and consistent about the growth driven by innovation. Right? So as we stated before, we're reconfirming the $50 million, which should say a lot about our ability to control our destiny there and the outlook for our innovation. So let's start with that. Secondly, it's the first year of launch of these products. And, therefore, the momentum around the demand for these products with our customers will only increase over time. So, therefore, just on the back of that, expect that new product revenue of this same base to increase. Secondly, not an insignificant part of the future growth will be driven by the consumables part in the advanced surgery business. And as we're booking, you know, for a large extent, the capital goods piece of that business, as systems of our customers are starting to get placed and introduced, the procedure growth rate will go up, and the consumable parts of the business will compound in a not insignificant manner for the rest of the decade. Third, we will launch additional new products that are not in the $50 million. We commented that we expect at least 50% more new products over the 50 that we've introduced last year to be introduced in 2025. The contribution of those products in the revenue is still modest, but you can, of course, expect that contribution to compound over the next years as well. So in short, the answer to your question is yes. We expect the innovation and new product side to be a more significant impact on our growth going forward.

Got it. I will hop back in queue and let others ask. Thanks very much.

The next question is from Brian Drab with William Blair. Please go ahead.

Hi. Thanks for taking my questions. I wanted to first...

Hey. Good morning.

Just wanted to first clarify, make sure that I heard this correctly. On the EUV and DUV side, I think that you talked about, you know, getting some initial orders for a subsystem product. Is that, you know, expected to materially increase your content with your customer there and that, you know, something that is going to be pretty broadly rolled out over their existing installed base, or is it in new products? And how does the timing of that revenue look throughout the year?

Yeah. Yeah, Brian. Thanks for the question. Well, we're excited that we're starting to ramp this product or this product category, rather. Yes, it's an intelligent subsystem. Yes, it will increase the content within this particular category with this particular customer set. And it will be the first year of ramp, and it will be more geared towards the second half of the year, which is what we thought would happen, but it's good to see that confirmed. We're resolving a major set of issues for this customer set, and therefore the value that we bring to their customers is actually quite significant. So I won't go into further detail because it will then start to breach some confidentiality agreements that we have. But it's fair to say that, yeah, we and our customer are excited about it. The impact of this launch is part of the $50 million, and we expect the contribution of that, of course, to grow in the coming years because we're just only starting to ramp in the latter part of this year. And then there's further opportunity to further expand content and expand scope and reach, but I'd rather not comment on that at this stage. But it looks promising.

Okay. Thanks. And then you commented again in the prepared remarks on humanoids. And I wasn't sure as I was taking notes here if you made a comment on orders picking up broadly or did you specifically say with humanoids, you saw orders picking up in the fourth quarter and into January and February? Can you just clarify that? And then can you elaborate on how that business is building? Is this really a revenue-generating business for you maybe in 2025, 2026?

Yeah. I mean, the humanoid category is still small, but it's growing rapidly. I would just argue that what we're trying to message here is that we're getting a lot of questions like, hey, why are you growing robotics and automation whereas the overall market seems to be more subdued? And our answer is we're more geared towards specialty robotics and high-performance robotics, high-precision robotics that includes surgical robotics, obviously, but also warehouse automation and humanoids. Right? And as a result, of course, we're possible in these precision robotics categories that will drive further adoption. Now it's too early to say that this category will become a prevalent category in the world and therefore for Novanta's portfolio. But it's fair to say, and this is why we're commenting on it, it's a testament to the incredible capability of Novanta's technology that has new players in terms of incredibly precise, small form factor, high power density, extremely compact, and embedded safety, which is all incredibly important in these types of applications. And we're uniquely positioned to actually sell multiple products, whether it's servo drives, whether it's actually force torque sensing, whether it's compact encoders, all of which provide a sense of touch and precision motion at low latency that are unmatched. That's why we're commenting on it because we do see a demand there. Long term, I think, on humanoids, let's kind of wait and see how the application evolves. But so far, we're working with all the key leaders.

Okay. Thanks. I'll get out of the way and maybe jump back and ask one more later.

Thanks, Brian.

The next question is from Rob Mason with Baird. Please go ahead.

Yes. Good morning. I wanted to... you already touched, Matthijs, just on EUV, DUV is probably more second-half weighted, but I just at a high level around the $50 million of incremental revenue. I mean, can you give us any help just how we should think on cadencing, I don't know, maybe even first half, second half, just around the contribution from that overall $50 million?

Yeah. Hey. I mean, let me start and then just give it a high-level answer, and then Robert can provide more specifics. And when we, you know, as you would expect, you see the crescendo, of course, increasing as the year progresses. So every quarter, we'll get steadily better. Right? And as I also said, there is the launches. I mean, a large chunk is focused on the hospital and surgical center market, a very robust market. And so there's a lot of pull for the product, but there is, of course, also some timing of when what, which OEM will launch, what product. Some of them are soft launches. It will be coming full launch kind of at the middle of the year. Some of them are already launched and are starting to ramp. Right? So there's all these dynamics, but I think the option is it's a gradually but very steadily increasing momentum throughout the year, quarter over quarter. Anything else that you...

I would say, you know, by the time you get to the third quarter, you're probably in the high single-digit and then low double-digit in the fourth quarter type of revenue, and that's consistent with the ramp of predominantly the insufflators and the pumps. And then a little bit in the fourth quarter, you're picking up semiconductor new product revenue as well.

I see. Okay. And then just last quarter, we talked about, you know, some early signs in the short-cycle businesses picking up semi or, you know, the electronics area. You know, some of the precision manufacturing. I'm just, you know, around those early green shoots that you saw in the third quarter, how did those sustain or move around, I guess, as you've entered 2025 and through the fourth quarter as well? Any update there?

Yeah. I would say they are sustained. They were still up strongly in the fourth quarter. They've sustained that growth for what we could see is at least for the first half, bookings have come in to cover demand for the first half around that. So there are some positive signs like that right now that are holding that momentum forward. So it does get back to, like, we're trying to be prudent with the guidance here, given the volatility of orders and shipments with people's, you know, disturbances around all the geopolitical changes that are occurring. But I think for the most part, you know, at the same time, we're seeing demand starting to fill in. And we're seeing that short-cycle business remain strong, and we're seeing the MPIs accelerate. And so there's more positives than there are negatives, but there's a news cycle that's very difficult to ignore.

Sure. Just last question. Matthijs, you sound reasonably optimistic around actionability on M&A this year. Pipeline sounds, you know, fairly robust as well. You just know, as you think about the opportunity set, and understanding, you know, these opportunities, you know, are just episodic in the way that they play out. How are you thinking about your, you know, comfort level, upper levels around leverage and just, you know, what you would be willing to commit to?

Yeah. Well, first of all, I mean, if you're a cynic, you could say, well, you were confident last quarter, so what happened? And I would just say, listen, we have multiple active conversations. We're actually very excited about them. But it doesn't mean we should just jump on any opportunity. We remain very disciplined on price. And some of the time, these discussions where we don't want to have time be the determining factor. So let me just start with that. So a lot of these conversations are still ongoing, so that's one. And there is actually multiple news added. We feel the overall environment for M&A is very supportive, is improving. And we see more and more assets coming on the market as well as, you know, founders and private owners becoming, you know, more willing to have conversations. That's not, you know, dissimilar from what we've seen when there is a lot of macro uncertainty, particularly for a prolonged period of time, that's actually the moment when people are becoming more willing to have conversations. We saw that with Brexit, for example. We saw that with the previous trade wars, etc. So that, I would just say, provides all of that provides the support for my comments that we're very confident and excited about it while remaining disciplined, you know, on price and returns. Then, of course, where we're looking and what type of, you know, spaces we're looking at, wouldn't be a surprise that it just assures our strategy to either and in secular markets that we're excited about, whether it's healthcare, you know, particularly given the environment that is robust, as well as intelligent subsystems or when possible, find, you know, consumables that have a high IP component. So that's kind of the direction, and that's where kind of the majority of the conversations are happening, and that software is part of that too. So those are aspects that we're pushing. In terms of leverage, I mean, I think we've been very consistent about that. But, Robert, you know, you can reiterate or further comment on that.

Yeah. I would say we don't have an interest in putting the company in a levered position. So, you know, we have been pretty consistent about that. Staying below three times. You look at on a net basis, we're 1.4 right now. So I think we're in a fairly good position to do what we want to do. And more meaningful acquisitions within the bandwidth and within the scope of our parameters. And I do reiterate what Matthijs said. You know, we're focused on the returns. There are attractive returns out there. You know, most of the deals we pursue are proprietary in nature. As a consequence, they're less predictable on closing because they're not running some sort of process. And so, but at the same time, you know, we're going to make sure we do the right things and compound the cash flows of this business in the right way without putting any sort of jeopardy or undue risk onto the business.

Very good. Appreciate it.

The next question is a follow-up from Brian Drab with William Blair. Please go ahead.

Hi. Just a quick question. Hey. So last quarter, there was a discussion of, I guess, a minor pause in your sales into robotic surgery with one customer. And I'm just wondering if you could comment on is that resolved? And then also, can you just talk about are you seeing continued diversification of your revenue into robotic surgery across a broader customer base at this point?

So the first is the shipments into the robotic surgery space have been resolved. They're back to normal in January. And so there's no disruptions there. So we feel pretty good about the position there. Obviously, we've increased our content with that customer and done fairly well. In terms of diversifying with additional players, it really comes down to the success of those additional players. We've been designed into a multitude of OEMs for a long period of time. They just haven't shipped with the volumes that'd be meaningful, with one or two exceptions. And so it really comes down ultimately to their own commercial success in the marketplace. We continue to work with a large variety of customers in that marketplace. We continue to be optimistic that there will be additional robotic plays in the hospital environment and then into different modalities. It could be orthopedics. It could be into spine. It could be into neurological. It could be a number of different application areas, and we feel good about being in all those areas if they begin to grow.

Great. That's helpful. Thank you very much.

Yep. Thanks, Brian.

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

Thank you, operator. And so to recap, we're proud of the progress we've made in 2024 with strong operating performance, core gross margin expansion, adjusted EBITDA growth, record cash flow, and a return to organic growth in the fourth quarter. Our new product ramps are on track for 2025, and we've reorganized to scale better organically and through acquisitions, hired top leadership, and strengthened our talent pool. I'm incredibly proud of our teams' achievements. Looking ahead, we remain focused on the three top priorities for 2025. First, ramp up our planned new products and achieve our new product sales growth. Second, further expand our growth system. And finally, acquire additional companies that fit our strategy at attractive returns. Despite the global macro dynamics, Novanta remains extremely well-positioned in the medical and advanced industrial markets with diversified exposure to long-term secular macro trends in precision manufacturing, robotics, and automation, precision medicine, and advanced surgery. We feel that our winning strategy and our deployment of the Novanta growth system to continuously improve our company operations is what drives our performance no matter the environment. In closing, as always, I would like to thank our customers, our employees, and our shareholders for their ongoing support. I continue to be specifically grateful for the continued and persistent efforts of all Novanta employees who work together every day to take on new challenges and strive to make the company a 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 first quarter of 2025 earnings call. Thank you very much. This call is now adjourned.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.