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Edited Transcript of NOVT earnings conference call or presentation 5-Nov-19 3:00pm GMT

Q3 2019 Novanta Inc Earnings Call

BILLERICA Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Novanta Inc earnings conference call or presentation Tuesday, November 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthijs Glastra

Novanta Inc. - CEO & Director

* Ray Nash

Novanta Inc. - Senior Director of Finance

* Robert J. Buckley

Novanta Inc. - CFO

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Conference Call Participants

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* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner & Analyst

* Lee M. Jagoda

CJS Securities, Inc. - Senior MD & Analyst

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Presentation

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Operator [1]

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Good morning. My name is Francesco, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated 2019 Third Quarter Earnings Call. (Operator Instructions) Please note this event is being recorded.

I would like to turn the conference over to Mr. Ray Nash, Corporate Finance Leader. Please go ahead.

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Ray Nash, Novanta Inc. - Senior Director of Finance [2]

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Thank you very much. Good morning, and welcome to Novanta's Third Quarter 2019 Earnings Conference Call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is our 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 Chief Executive Officer of Novanta, Matthijs Glastra.

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Matthijs Glastra, Novanta Inc. - CEO & Director [3]

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Thank you, Ray. Good morning everybody, and thanks for joining our call. Novanta performed in line with our expectations in the third quarter of 2019 with revenue flat sequentially versus the second quarter, and EPS exceeding the top end of our guidance. Our company delivered $154 million in revenue, representing a 6% year-over-year decline on an organic basis, and 4% decline on a reported basis. Year-to-date, our revenue grew just below 2% year-over-year, both on a organic and a reported basis. We exceeded the top end of our adjusted earnings per share guidance at $0.53, adjusted EBITDA was $31 million, our book-to-bill was 1.04 in the quarter, and bookings grew sequentially by 14% versus the second quarter.

Our team executed very well in a deteriorating industrial capital spending climate. Novanta's 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, vision and photonics capabilities in a diverse set of applications driven by secular Industry 4.0, precision medicine and healthcare 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 in secular growth applications such as robotic surgery, minimally invasive surgery, DNA sequencing, advanced material processing, and precision automation and robotics.

In the third quarter, we continued to see solid momentum and success in our efforts to introduce new innovations to our customers. On the back of our innovations -- in innovation investments made, we feel our innovation pipeline is the strongest in a decade. As a result, we are committed to continue to invest in R&D to bring these innovations to market in the second half of 2020 and 2021. We also continue to see the fruits of our labor in today's results. New product revenue year-to-date grew 26% year-over-year. Our vitality index, which is revenue from new products launched in the last four years, year-to-date continue to be 25% of sales versus mid-single-digit percentages a few years ago.

Our third quarter design wins accelerated to over 30% year-over-year growth, as our teams executed, on the strong funnel of design win opportunities. We're seeing many customer platforms openings with the opportunity to gain share on the back of our strong innovation pipeline. All-in-all, I'm proud of the strong performance by our team in the third quarter.

In the quarter, we have appointed our -- one of our strongest leaders and operators in the business to oversee and accelerate an implementation of our Novanta growth system, and corporate supply chain efforts. This appointment is a testament to our growing internal talent pipeline.

The Novanta growth system is a common way of working a set of common tools and processes vigorously applied across the entire Novanta enterprise to accelerate and drive sustained long-term growth and operating performance with initial focus on customer satisfaction, gross margin expansion, and inventory optimization. We feel that with this appointment we will be able to orchestrate and harmonize our efforts more swiftly in areas such as end-to-end supply chain performance, supplier consolidation, continuous improvement, manufacturing competence centers and footprint rationalization, and value pricing. An important element in our capital deployment strategy is M&A. In the third quarter, we closed our third acquisition this year Arges. And Arges dramatically accelerates our intelligent laser scanning subsystem strategy into high growth markets such as additive manufacturing, micromachining and medical applications. The acquisition doubles our engineering capabilities in laser beam steering and adds a phenomenal breadth of proprietary IP and knowhow to our Photonics segment. We see strong sales and technology synergies of applying these capabilities through the Novanta photonic sales channels. And while the base and project business of Arges short term is affected by macro industrial headwinds, Arges engineering capabilities have greatly exceeded our expectations. As we look at it right now, we will be able to accelerate our innovation pipeline in a very meaningful way with the first products hitting the market in 2020. From an M&A pipeline perspective, we remain very disciplined on strategic fit and returns, and we will move quickly if an opportunity arises that we feel accelerates our strategy.

Now, let me touch on what we're seeing in our markets in the overall macroeconomic climate. Our medical markets continue to be very robust. We see mid-teens double-digit growth in our medical businesses in the third quarter and expect that momentum to continue for the full year of 2019. Momentum is broad-based, but we are particularly pleased with the momentum in robotic and minimally invasive surgery. Novanta is gaining share in these markets driven by innovations and expect that momentum to continue in these areas.

I would also like to point out, we're achieving double-digit growth in our 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 our growth engine in 2019 in an uncertain macroeconomic climate.

We saw a further decelerating momentum in the industrial capital spending climate in the third quarter consistent with further deterioration in the lowest PMI indices we have seen since 2012 for most geographies. The uncertainty we reported on in our last earnings call continued to cost softening in our advanced industrial market. This is purely a macro environment phenomenon, as we're actually gaining share in this tough environment. And although we've seen some bottoming out with bookings, which are growing sequentially by 14%, these bookings came in late in the quarter with request states mostly for 2020.

We now expect only a modest sequential improvement of our business in the fourth quarter.

Geographically, the trade wars with China, and the resulting customer uncertainty were particularly felt in the Asia-Pacific region and Europe. Our revenue to China in the quarter deteriorated rapidly to a 32% decline in the quarter, and 18% year-to-date driven by microelectronics and industrial material processing market declines in our Photonics segment. We're seeing signs of markets bottoming out in China driven by growing demand for 5G and cloud-based infrastructure investments. As a reminder, while microelectronics in China contributions are relatively modest at about 10% of our overall revenue, declines are meaningful enough to have an impact at the Novanta level for year-over-year comparisons. Our teams are performing very well in Europe, where our business is up 11% year-to-date. However, deceleration was felt here as well with third quarter revenue down low-single digits versus the prior year.

While we're decisively trimming manufacturing costs in weak areas, we still do see this weakness as temporary, and we're not wavering on our conviction of innovation in growth and investments to expand our proprietary technology positions through the business cycle. As mentioned before, we feel we have the strongest innovation lineup in a decade and seeing an opportunity to gain share through the cycle.

Now, let me turn to our operating segments. Starting with the Vision segment, which was again the absolute growth story this quarter with strong momentum carrying into the rest of the year. As a reminder, the Vision segment predominantly serves the medical market. Large application includes a minimally invasive surgery, in vitro diagnostics, and other medical devices. For the third quarter, our Vision segment delivered a very solid 13% year-over-year revenue growth. Growth continued to be driven by new products and new product allowances of customers. In the Vision segment, new product revenue year-to-date grew over 60% versus last year, and total new product revenue maintained at about 35% of sales year-to-date. The book to bill in our Vision segment was 1.03. 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 continue as we progress through 2019.

Our MIS business performed extremely well in the third quarter of 2019, continuing its momentum from the last few quarters. We couldn't be more pleased with the innovation's strengths and the customer relationship depth of this business. The one team did a superb job in keeping up with a tremendous demand for one of their new product innovations, the FM300 insufflator with integrated smoke evacuation.

Our FM300 insufflator product innovation integrates smoke filtering and evacuation functionality into the insufflator, optimizing workflow and not requiring a separate smoke evacuation box. Worldwide and in the US, laws have been passed or pending required smoke evacuation devise, a surgical smoke is a dangerous byproduct, if the vaporization of tissue with energy-based devices during approximately 95% of all surgical procedures. Our WOM business is uniquely positioned to capitalize of this market opportunity.

Moving on, we are very pleased with the addition of Med X Change through our NDS business. NDS now has a more significant exposure to the attractive integrated OR segment with a strong product lineup for 2020. In addition, the NDS business continue to substantially improve its profitability, and it is expected to complete the product production transfer into our MIS manufacturing component center in the fourth quarter, improving scale and efficiency.

Finally, our Detection & Analysis business continue to show solid momentum around new product launches of medical-grade RFID and machine vision product offerings. In the third quarter of 2019, the business continued to see strong double-digit growth in its RFID machine vision revenue.

Our Precision Motion segment revenue declined 21% year-over-year in the third quarter where fantastic growth momentum in robotic surgery could not offset declines in microelectronics, semiconductors, and industrial markets. We feel these declines are temporary, and as a result, there is a certain order stopped late in the second quarter, which led to revenue timing challenges against tough comps in 2018.

We're seeing the first signs of recovery, giving the uptick in demand for 5G and cloud-based infrastructure investment, and are seeing orders improve. The Precision Motion book to bill improved to 0.94 in the third quarter with bookings improving sequentially by 10% on an organic basis. We continue to like our position in precise and dynamic motion control technology serving multiple markets with structural growth dynamics such as precision automation, unmanned vehicles, robotics, metrology, and robotic surgery markets.

We're also excited about the Ingenia acquisition earlier this year, which adds a critical motion control capability that now allows us to offer intelligent motion control solutions to our customers. The first product family, [average], which was just launched, is based on the unique gallium nitride technology, or GaN, which enables ultra small form factor and footprint with an order of magnitude lower, fewer wires and less weight. This allows for close integration of our precision motors encoders with demotion controls, reducing the weight and size. We believe this is particularly critical in surgical and precision robotics as well as unmanned vehicle applications. Within the Precision Motion segment, year-to-date, new product revenue grew 70%, and our design wins grew more than 50% versus last year as we bring new innovations to market and are expanding our commercial teams.

Turning to the performance of our Photonics segment, revenue was down 11% driven by Laser Quantum ended deteriorating industrial capital spending climate. And as indicated in our last earnings calls, Laser Quantum revenue in the third quarter declined double-digit year-over-year as expected, due to the dynamics in DNA sequencing, we have rightly reported on in the last few earnings call. We believe this short-term lumpiness is temporary and up correlated our long-term market demand nor our competitive position, and we reiterate our excitement about the long-term growth prospects of this business as DNA sequencing is still in a very early stages of penetration into clinical applications with numerous positive catalysts on the horizon.

The performance of the Photonics segment was also impacted by the deteriorating macroeconomic headwinds and industrial capital spending markets that we just discussed, and which our Synrad business is particularly sensitive too. As indicated in our last call, this was a drag on our growth in the third quarter with more stabilization expected in the fourth quarter as third quarter bookings grew sequentially by 16% versus the second quarter.

Our Photonics team is doing a fantastic job in gaining share in the tough environment. Design wins accelerated and grew close to 80% year-over-year in the third quarter. Photonics book to bill was 1.11 in the third quarter, and bookings grew sequentially by 15% versus the second quarter. We expect revenue in Photonics to improve sequentially in the fourth quarter on an organic growth basis.

To wrap up, we're very pleased with our positioning and performance in our medical business and proud of the performance and agility of our teams in a weak industrial capital spending environment. Our design win activity is accelerating, our bookings recovering, and new product introductions and innovation pipelines are as strong as they have ever been. We feel Novanta is very well positioned in an uncertain macroeconomic environment, which is showing some signs of stabilization. Novanta's leadership position across the diversified medical and advanced industrial markets, combined with our disciplined approach to M&A, is providing a solid foundation for long-term sustainable profitable growth. Therefore, we remain focused on our strategy to expand in growing medical markets and 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?

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Robert J. Buckley, Novanta Inc. - CFO [4]

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Thank you, Matthijs, and good morning, everyone. We delivered $154.1 million of revenue in the third quarter of 2019, a decrease of 4% year-over-year on a reported basis and the decline of 6% on an organic basis. While the industrial capital spending environment and the economic climate in Europe and China deteriorated in the quarter, we are pleased with the organization's ability to deliver on our promised revenue guidance for the quarter.

From an end market perspective, sales and microelectronics applications were down more than 30% year-over-year, which is similar to the prior quarter. Sales of the industrial end markets were down nearly 20%, which worsened from the second quarter, as we previously communicated, due to the order delays in the second quarter. And sales to medical end markets were up high teens year-over-year, despite the headwinds in DNA sequencing in the quarter. Overall, sales and bookings were largely in line with our expectations.

Turning to profit. Our third quarter GAAP gross profit was $64.1 million or 42% of sales compared to $69.6 million or 43% of sales in the third quarter of 2018. On a non-GAAP basis, third quarter adjusted gross profit was $67.4 million or 44% of sales compared to $72.1 million or 45% in the third quarter of 2018. Our adjusted gross margins were roughly flat sequentially and down versus the prior year driven by the significant growth in our medical consumables product line, which is driving an unfavorable mix effects. The adjusted gross margins in our Photonic segment continue to improve sequentially, despite the lower sales year-to-date as the team has done an excellent job at reducing the cost of poor quality to their lowest level in the years, and by implementing proactive cost control measures to mitigate the near-term reductions in volume.

Within our Vision segment, we also experienced sequential gross margin improvements driven by the strong improvement in our Detection & Analysis business and greater manufacturing overhead leverage in our MIS business. It was another strong example of our teams utilizing the tools in the Novanta growth system to reduce the cost of poor quality, leverage their infrastructure, and deliver on their customer commitments. It was particularly noteworthy as the Group is carrying the cost of a redundant manufacturing facility through year-end until production for the NDS is fully moved to our German manufacturing center.

Finally, the adjusted gross margins of the Precision Motion segment were down sequentially driven by a sharp downturn in the microelectronics applications. We believe the volume drop here is temporary, given the demand for 5G and cloud-based infrastructure investments in China, and hence we did not adjust the cost structure aggressively for fear of damaging on our ability to react quickly to an improving environment.

Moving onto other financial results. Third quarter R&D expenses were $13.8 million or 9% of sales compared to $13.2 million or 8% of sales in the third quarter of 2018. As Matthijs mentioned, we intend to protect our investments in Novanta in R&D, as we strongly believe the economic climate will provide us with the opportunity to take market share through product innovation. This was evident in the quarter with a greater than 30% growth in design wins and the strong growth in new product introductions. In addition, customer discussions happening today around new opportunities and product platform further cements our view of protecting our R&D investments.

Third quarter SG&A expenses were $28 million or 18% of sales, compared to $29 million or 18% of sales in the third quarter of 2018. GAAP operating income was $13 million in the third quarter of 2019, compared to $21 million in 2018, whereas non-GAAP operating income was $26 million or 17% of sales, compared to $30 million or 19% of sales in the prior year. And adjusted EBITDA was $31 million in the third quarter of 2019 or 20% EBITDA margin, compared to $34 million in the third quarter of 2018. Interest expense in the quarter was $2.2 million versus $2.4 million in the prior year. The weighted average interest rate of our senior credit facility is 3.1% in the third quarter, as we took advantage of lower interest rates in Europe to borrow for our Arges acquisition.

On the tax front, our GAAP tax rate was 18.8% in the third quarter of 2019. It differed from the Canadian statutory rate of 29% driven largely by jurisdictional mix of income. On a non-GAAP basis, our tax rate for the third quarter of 2018 was 21%, which again was impacted by our jurisdictional mix of income, most notably from higher income generated in Germany from our MIS business unit.

Our GAAP diluted earnings per share was $0.25 in the third quarter of 2019, compared to diluted earnings per share of $0.60 in the third quarter of 2018. On a non-GAAP basis, adjusted earnings per share was $0.53 in the quarter, compared to 61% in the prior year. We ended the third quarter with 35.6 million diluted weighted average shares outstanding.

Third quarter operating cash flow was $7 million, compared to $27.4 million in the third quarter of 2018. This result was disappointing, but the cost was largely timing-related. Shipments in the quarter were more back-end loaded than expected causing an uptick in accounts receivable and another uptick in inventory. We continue to view our net working capital as an opportunity and expect to recover the cash as we better schedule shipments with our customers, and closed down the San Jose manufacturing facility.

We ended the third quarter 2018 with gross debt of $229 million and our gross leverage ratio was 1.8x defined as gross debt divided by rolling 12-months pro forma EBITDA. Our net debt was $168 million as of the end of the third quarter or roughly 1.4x.

In addition, despite the recent acquisition activity. We continue to build a very healthy acquisition pipeline, particularly around medical end markets. You should continue to expect us to be highly disciplined around maximizing cash flow returns and ensuring future transactions will accelerate our financial goals.

Turning to guidance. The economic news from China and Europe as well as the global capital spending sentiment are showing that the global trade disruptions are fueling economic uncertainty and causing customers delay or push-up their projects. While our design wins are continuing to accelerate, we are seeing customers reschedule deliveries until the New Year, specifically around project-based work. After carefully reviewing customer schedules, we now expect approximately $10 million of revenue shifting out of the fourth quarter to 2020. We believe we have not lost market share and have not seen a customer cancellation, but rather the economic climate has made our customers plan much more conservatively until global trade relations become clear and capital investment sentiment improves.

In the fourth quarter of 2019, we expect GAAP revenue in the range of $156 million to $158 million. Adjusted gross margins are again expected to be between 44% and 45%, R&D expenses for the fourth quarter will remain around 9%, and SG&A expenses are expected to be around 19%. Depreciation, amortization and stock compensation expense will be at the same levels they were in the fourth quarter -- in the fourth quarter as they were in the third quarter. Interest expense in the fourth quarter will be in line with the third quarter absent any significant debt pay down. We expect to see non-GAAP tax rate of just over 20%. We expect fourth quarter 2019 adjusted EBITDA to be in the range of $30.5 million to $32.5 million. Finally, we expect fourth quarter 2019 adjusted diluted earnings per share to be in range of $0.52 to $0.54. Diluted weighted average shares outstanding with 35.6 million. As always, our guidance does not assume any significant impacts from foreign exchange rate changes.

Overall, we feel confident in our ability and the strengths of our portfolio to manage through the softness we see in the industrial markets. Our medical business is continuing a strong growth trajectory with tremendous demand across various products and multiple end markets, which is giving our portfolio resilience. Our design win activity is accelerating. The new product introductions are as strong as they've ever been, and this gives us confidence that we'll exit the year with strong momentum, and are well positioned to deliver on our 2020 financial goals. The acquisition activity completed thus far, further cements this view.

Finally, I'd like to mention that we significantly raised our focus and effort on Novanta growth system in the quarter. As Matthijs mentioned, we named one of our highest potential business leaders to enroll champion and institutionalizing the Novanta growth system disciplines across the company. He and his team and the business units will be passed and compensated on driving our net working capital down, and improving gross margins 100 basis points a year, over the next five years.

We are very proud of the performance of our employees and their commitments to helping us whether this difficult industrial environment. We remain excited about our future and look forward to continuing to deliver on our commitments to our employees, our customers, and our shareholders.

This concludes our prepared remarks. We'll now open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Lee Jagoda with CJS Securities, Inc.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [2]

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It's Lee from CJS. So just starting with, I guess, we'll call it the in vitro diagnostics end market. Can you talk about the outlook for Q4 versus the guidance that you gave on the Q2 call?

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Matthijs Glastra, Novanta Inc. - CEO & Director [3]

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Yes, I would say there is no change in that, so that business returns to sort of flattish performance in the Q4. So there is -- we're not seeing any kind of delays there in any push-outs or any sort of changes from what we communicated last quarter.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [4]

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And then as we look at the 2020, that in line with market growth or, however, you want to put at should return. Is that the expectation?

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Matthijs Glastra, Novanta Inc. - CEO & Director [5]

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While we are -- what I would say is, we are embedded on all the high throughput screeners in the DNA sequencing market, so, in relation to one large customer. So how they perform and how we'll perform.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [6]

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Okay. And then, looking at Q1 of 2020, seasonally, typically, you see a modest organic decline versus Q4. However, obviously, given the softness and some of the push-outs you talked about, is that still a reasonable expectation? And how do you think about that $10 million of push-out, does it hit right away or does it kind of gets spread out?

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Matthijs Glastra, Novanta Inc. - CEO & Director [7]

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Yes. I was trying to steer clear of getting into 2020. It is fair to say that that will definitely benefit us in the first half. There are a couple of other things going on in the first half is, obviously, some more difficult comps on the medical side of the business, and the industrial is remains to be seen.

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Robert J. Buckley, Novanta Inc. - CFO [8]

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Yes. So I would say, Lee, from a market perspective, right. I think we continue to see our medical business to be robust. Keeping in mind that we have indeed -- after growing double-digits very strongly this year, we have some tougher comps next year. And yes, and the industrial climate will -- yes, is expected to be uncertain, while we do see, of course, much easier comps in the second half of next year. So that's how we're looking at it right now. And we'll get more into detail, let's say, once we give our full year guidance for 2020.

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Lee M. Jagoda, CJS Securities, Inc. - Senior MD & Analyst [9]

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Got you. And then just one more, and I'll hop back in. On the Vision segment gross margins, obviously, you highlighted mix towards consumables dragging down your margins. But given the facility consolidation headwind in the duplicate facilities you're running, how much do you think that is dragging you down negatively. So as we look into next year when that switches to a neutral or positive, in addition to everything else you're doing to improve margins. What sort of the low hanging fruit on margin expansion within Vision?

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Matthijs Glastra, Novanta Inc. - CEO & Director [10]

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Well, I think what -- let me go answer it a few ways. So one of the big benefits in 2020 in the Vision segment is the closure of the NDS manufacturing facility, which adds about $2 million worth of benefit to us. And so you'll see an uptick in the Vision gross margin as a consequence of that manufacturing facility completely closing down. That's one of the big first steps. The other steps we're working on are obviously the low-cost manufacturing facility, that will take a little bit longer. We're looking at pricing decisions in the business, and we're looking at what we call [VAVE], which is Value Engineering to reduce the cost of manufacturing and reduce the complexity of the manufacturing to improve the gross margin.

And then the final thing we're looking at is increasing the amount of throughput that we can get through the existing facilities, which were then thereby allow us to leverage the footprint that we have in Germany even better. And so, we look at this is kind of a grad, next year, it will be a little bit of a step-up in gross margins in the Vision segment that will help us. Then as an overall company, we should not see as much of a headwind as a consequence of what's happening in there. And that will allow us to drive that higher gross margin improvement.

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Operator [11]

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The next question is from Brian Drab with William Blair.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [12]

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Would you mind stepping through the book to bill for each segment, and for the total?

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Robert J. Buckley, Novanta Inc. - CFO [13]

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Yes. We'll do that right away. So for the third quarter, we -- the Photonics segment book to bill was 1.11. Yes.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [14]

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Okay.

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Robert J. Buckley, Novanta Inc. - CFO [15]

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For the Vision segment, it was 1.03, and for the Precision Motion, it was 0.94, and where we set for Precision Motion, actually the -- that improved versus the second quarter. All segments actually improved their bookings sequentially. Yes. And overall, the sequential bookings improvement was 14%, so 14% versus the second quarter.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [16]

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Okay. Got it. And sorry, did you say the aggregated book to bill?

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Robert J. Buckley, Novanta Inc. - CFO [17]

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1.04 -- it's 1.04.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [18]

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Got it. Okay. And bookings up 14% in aggregate?

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Robert J. Buckley, Novanta Inc. - CFO [19]

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Right. Versus the second quarter. Yes.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [20]

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Got it. Versus 2Q. So, Robert, you just made the comment that you are steering clear of 2020 guidance, and that's, obviously, understandable. But in the past, I think, it was on the second quarter call, you did mention that you thought that a 46% gross margin was achievable in 2020. I just wonder, it seems like some things have changed since then obviously. So, how do you -- you step back from that?

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Robert J. Buckley, Novanta Inc. - CFO [21]

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Yes. No, I didn't mean to step back from that if that was an intent. So we do see better gross margin improve next year. And that is certainly, -- what I was being a little hesitant on is giving some details around the sales mix, and then what to expect on a quarterly basis. But from a gross margin, we're exiting the year with some nice benefits, not only are we gaining on the material productivity side, but we get to close the -- that NDS manufacturing facility, and that's carrying a lot of costs associated with it. So there is a number of things that really kind of benefit us. And then frankly, as you look at -- you get the easier comparables in the back half of the year on the industrial side, and the portions of those business -- when they return, it will be higher margin than what you see on the medical side. And so, you get a little bit of a better mix effect in the back half of the year as a consequence of that.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [22]

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Okay. Great. And then so just to be really clear, you said, you did not back away from the 46%, as a full-year target for gross margin?

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Robert J. Buckley, Novanta Inc. - CFO [23]

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Yes. I did not back away from that.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [24]

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All right. Okay. Okay. I just want to make sure I heard it correctly. And then just one last question, Matthijs, you talked about some of the acquisitions, I think was with respect to Arges that that could have a meaningful impact on your business. And I was just wondering if you can just talk in a little more detail about the timing and kind of magnitude of what you mean by meaningful, I guess?

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Matthijs Glastra, Novanta Inc. - CEO & Director [25]

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Yes. So meaningful means that we fundamentally can accelerate and rejuvenate our Cambridge Technology innovation pipeline. And pull forward the plans that we have had maybe coming to the market in three to four years from now to kind of 2021, and the second half of 2020. So that's what we feel is meaningful, right? And we're talking not like one product, we're talking in line up of probably 6 projects here. And all targeting high-growth markets. Fundamentally, improving our architecture and rejuvenate to basically further expand our leadership position in integrating the IP that Arges has, which takes years to develop, right? So, and what's great to see is that the engineering teams of those two entities that are now just basically matched into one are just super excited too to accelerate, because it's -- basically, the capabilities are truly complementary and the engineers couldn't be more excited, which is to me, you don't know that ahead of when you do an acquisition, but to see that come to fruition, Yes, it makes me really excited. And these are the type of acquisitions that might take a little longer before you see kind of the financial benefits, but strategically, yes, we couldn't be more pleased. So we will report in 2020 when these products will get introduced, obviously. As a reminder, these products will then have to be designed in to customers. So before you see revenue contributions, it might take a little while. But, yes, we were taking a leap forward here in terms of our potential in the high growth markets like micro machining and additive manufacturing. And last but not least, our customers are giving us that this feedback too. So it's not only internally, our customers are really impressed with this lineup. So...

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [26]

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And so, is the bigger opportunity or maybe the answer, this is all of the above, but is it a bigger opportunity in getting into some new end-markets or is it more again…

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Matthijs Glastra, Novanta Inc. - CEO & Director [27]

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Yes, it was basically.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [28]

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Go ahead, sorry.

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Matthijs Glastra, Novanta Inc. - CEO & Director [29]

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Yes, sorry, where we -- the line is a little choppy. No. So what I -- the way I see it is we were able to win new customer platforms, because we were not able to address certain segments or certain customers, because we didn't have the full capability set and we were developing that. But now with the Arges acquisition, we just accelerate that capability set. So we can go after those platforms, (inaudible) much more quickly. So it is – summarizing, it is going deeper in certain segments that we were in today that are growing like laser additive manufacturing but conquering new customer platforms. And then also...

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [30]

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Okay.

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Matthijs Glastra, Novanta Inc. - CEO & Director [31]

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Accelerating entry into new market segments. Yes.

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Operator [32]

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

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Matthijs Glastra, Novanta Inc. - CEO & Director [33]

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Thank you, operator. So to summarize, in the third quarter of 2019, Novanta delivered a solid performance in an uncertain macroeconomic environment. We're very pleased with our positioning and performance in our medical businesses, and proud of the performance and agility of our teams in a weak industrial capital spending environment. Our design win activity is accelerating new product introductions and innovation pipelines are as strong as they've ever been, and Novanta's leadership positions across diversified medical and advanced industrial markets combined with our disciplined approach to M&A is providing a solid foundation for long-term sustainable profitable growth. We continue to feel good about the positioning of our businesses around secular macro growth drivers with over half of our revenue in robust medical markets. We see a long-term need for our Motion, Vision and Photonics capabilities in a variety of applications on the back of macro trends of Industry 4.0, precision medicine and healthcare 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. I'm particularly grateful for this strong contribution and execution of our teams of 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 from now on our fourth quarter, and full-year 2019 earnings call. Thank you very much. This call is now adjourned.

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Operator [34]

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