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 Incorporated 2023 Third Quarter 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. 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 2023 earnings conference call. I am Ray Nash, Corporate Finance Leader of 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've not received a copy of our earnings press release issued today, you may obtain it from the Investor Relations section of our website at www.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 am 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 had a solid third quarter with strong operating performance, delivering profit and cash flow above our expectations. Our revenue was in line with previously issued guidance. In the quarter, we delivered $222 million in revenue, representing a 1% year-over-year revenue decline on a reported basis, a 3% decline on an organic basis. Excluding microelectronic applications, our growth in the quarter was up low single digits. We recorded gross margins of 47% in the quarter and an adjusted EBITDA margin of nearly 24%. In addition, our cash flow was up over 2x the prior year and at more than 175% conversion to net income. This operating performance reflects excellent execution by our teams in an increasingly challenging macroeconomic environment. The Novanta business model, with diversified exposure to secular high-growth markets, has proven resilient under multiple geopolitical and macroeconomic scenarios. Our proprietary products and technologies are well positioned in medical and advanced industrial applications with long-term secular tailwinds such as robotics and automation, healthcare productivity and precision medicine. Medical applications now make up nearly 60% of our sales versus a single-digit percentage of sales a decade ago, which we believe provides Novanta with greater resilience during fluctuating macroeconomic conditions. We feel that our strong customer relationships with the leading OEMs in these medical and advanced industrial applications, the strength and diversification of our portfolio and our sticky business model will allow Novanta to deliver and drive better performance through the economic cycles. In the third quarter, the Novanta team has made excellent progress in bringing down lead times to our customers. The consequence of this change is that customers do not need to place long-term orders anymore, resulting in a book-to-bill of 0.8, which was in line with our expectations. However, this change in lead times improves customer satisfaction and allows the business to better trend with end-market demand dynamics. Speaking to the business environment more broadly, in the past couple of months, we have started to see more caution in some of our customers' ordering behavior. With the rapid rise in interest rates in recent months, continued weakness in China, and expanding geopolitical unrest, our OEM customers have seen their customers slow down ordering, particularly in industrial and more recently, some life science applications. While this has clearly been evident in the global purchasing managers indices for industrial spending, the rapid rise in interest rates has caused other capital equipment markets to be more cautious as well, deferring purchases until the new year. Given the strong secular growth drivers behind our markets and our customers' engagement on innovation, we see these current dynamics as temporary, despite the impact on the fourth quarter. Robert will discuss these dynamics in more detail when he covers guidance. It is important to note that the Novanta playbook and business model have demonstrated an ability to effectively navigate short-term headwinds. We've accomplished this while at the same time staying focused on making investments that expand our presence in secular high-growth markets. We continue to see active engagement and urgency with our customers to ensure their new product launches are a success. As a result, we're seeing a broad new product super-cycle entering late in 2024 and in 2025 and beyond, with key drivers including smoke evacuation insufflation, robotic surgery, next-generation lithography, laser beam steering for advanced material processing such as laser additive manufacturing and micromachining, robotic end effector sensors and mobile robotics. Given our sticky business model in these long-lifecycle growth applications, we strongly believe the mid and long-term outlook of our business, our end markets and Novanta's organic growth algorithm remain intact. Looking back to the third quarter, the broader end markets indicate that medical markets continue to be strong, industrial markets are decelerating in line with the PMI indices and interest rate environment, and microelectronics is bottoming at a low level. Excluding microelectronics, Novanta's revenue growth would have been up low single digits year-over-year in the quarter. Going into more detail, sales to medical markets remained strong in the quarter, growing 12% versus the prior year and making up approximately 57% of total Novanta sales. During the quarter, we saw increased shipments to many of our medical OEM customers with noteworthy strength in minimally invasive surgery equipment and consumables, surgical robotics, DNA sequencing, and integrated operating room equipment. These categories all saw double-digit growth in sales year-over-year, where long-term secular growth is driven by patient surgical procedure growth rates and advancements in biopharma technologies, including next-generation DNA sequencing. We continue to find new growth opportunities in our medical markets. For example, we see opportunities to expand our presence in DNA sequencing to the broader precision medicine market, including spatial biology, multiomics and other clinical life science applications, by combining the proprietary Novanta technologies into unique solutions for our customers. In doing so, we believe we can help our customers win by shortening their time to market and enhancing their differentiation. In addition, we continue to remain very excited about the long-term secular growth in minimally and robotic surgery markets, with Novanta continuing to win with our next-generation smoke evacuation, endoscopic pump technologies, precision motion drives, and our force torque sensors. Turning to advanced industrial markets, our sales in the third quarter, excluding microelectronic applications were down 6% year-over-year and made up approximately 36% of total Novanta sales. This sales decline was slightly more than we expected due to the rapid rise in interest rates and continued weakness in China impacting the industrial robotics and automotive sectors. While these trends are expected to worsen somewhat in the fourth quarter, customers remain very engaged and are using the slowdown to catch up on next-generation innovations. As a reminder, Novanta plays in advanced industrial applications with mid to single-digit growth driven by secular growth trends such as Industry 4.0, robotics and automation, and precision manufacturing. Finally, our microelectronics markets represented less than 8% of sales in the quarter. The dynamics are roughly the same as we said in our last call. In the quarter, we saw nearly a 40% decline year-over-year from the cyclical downturn in this market, particularly driven by our PCBA via hole drilling business, which is now run rating at just a couple of million dollars of revenue per quarter, which is immaterial to overall company results. We estimate that the overall drop in the microelectronics market will be a 400 basis point headwind on total Novanta sales growth for the full year. Again, excluding microelectronics, Novanta's revenue in the third quarter will be up low single-digit year-over-year. As we look out into 2024 and 2025, we do, however, remain excited that the composition of our exposure to this market will be a more secular growing and less volatile business. As we mentioned in prior calls, we believe our exposure to next-generation lithography will continue to grow, positioning us well to capitalize on a less cyclical element of the industry, with at least a decade's worth of growth still ahead of us. From a regional perspective, in the third quarter, sales to North America grew 11% year-over-year and sales in Europe declined by 2%, which reflects the challenging macroeconomic conditions in this region and its connections with the China market. Sales in China, which represented about 7% of overall sales declined 35% year-over-year, which was caused by the decline in microelectronics revenue, the industrial robotics pause, and overall microeconomic uncertainty in China right now. These regional trends are expected to continue in the fourth quarter. Now, let me touch on some of Novanta's strategic growth metrics. For our design wins in the quarter, we saw significant progress with numerous large customer wins. We had another large win with a leading minimally invasive surgery OEM, where their platform will now incorporate our next-generation smoke evacuation insufflator technology. Based on our design wins in this market, we expect Novanta's technology to be the standard of care for minimally invasive surgeries for at least the next decade. In addition, in the quarter, our medical solutions segment also had a large design win with a leading player in the integrated operating room market, where a video and data management product will be integrated into a new platform launching in 2025. Finally, this business closed a design win within the sports medicine and arthroscopy market with our proprietary pump technology, which is also expected to launch in late 2025 and expand our market share in this application. In the precision medicine and manufacturing, and robotics and automation segments, we also had several exciting wins. We continue to make significant progress expanding our exposure to next-generation lithography equipment, an area which has a decade long growth outlook. Given recent customer announcement, growth in this application is now expected in late 2024, which will accelerate in 2025. We're also very excited by recent design wins in our force torque sensor product line, which enables a sense of end of arm touch for robots in industrial and medical applications. After significant effort, this business has started shipping into the medical space, representing a significant milestone in realizing a critical value driver for the ATI acquisition. In addition, within our robotics and automation segment, we recently won a new multi-million dollar project with a leading robotics player who is planning to integrate our miniaturized high-performance server drives into their next generation of advanced mobile robotics. This opportunity will start to ramp up in 2025. We're excited by the impressive accumulation of customer design wins and our strongest innovation pipeline in a decade. We remain highly focused on executing our new product super cycle starting late in 2024 and into 2025, and reiterate with confidence our overall long-term growth framework of consistent mid to high single-digit organic growth through the business cycles. Next, our Vitality Index in the third quarter was about mid-teens percentage of sales, which is roughly the same as prior quarter, and in line with our expectations. Our new product pipeline is geared towards intelligent subsystems in applications such as minimally invasive surgery, robotic surgery, next-generation precision medicine, laser beam steering for micromachining, electric vehicle, robotic tool changers, precision motion solutions for mobile robotics, and warehouse automation. After our next-generation products start launching with customers in late 2024, we expect our Vitality Index to rebound to above 20%, driving sustained growth in secular growth markets. Moving on, I'm proud to say how our teams are embedding the Novanta growth system, or NGS into the way we work. During the third quarter, we held the President's Kaizen week in our Medical Solutions segment, bringing together dozens of our senior leaders and many other team members to focus on process improvements and problem-solving in critical areas for the business, such as the ramp of manufacturing of our in-house medical consumable products at our new Czech Republic factory. We're also using NGS project management tools to compress our time to market of NPI launches and compensate for delays due to supply chain shortages in the last 18 months. A critical tool we're deploying is 80-20 portfolio management. We're using this approach to rationalize a portfolio, reducing our exposure to products that are commoditized or nearing end of life. We're taking these actions to decrease complexity, improve profitability in light of near-term market conditions, and to allow the teams to focus more on ramping the multiple new products that will be coming online late in 2024. Overall, these tools in Kaizen events are becoming a critical part of our NGS deployment, our culture and demonstrating our commitment to continuous improvement and our ability to solve complicated problems that benefit our operating performance as well as improve customer satisfaction. Next, I'd like to give you a brief update on Novanta's acquisition activities. Acquisitions remain Novanta's top priority for capital allocation, and you should expect this to continue to be a critical part of our growth strategy. We have multiple active conversations underway today and would expect at least one of these materializing before year-end. You can expect us to lean in on expanding our presence in the megatrends I talked about earlier. We view disruptive macroeconomic environments as an opportunity to take advantage of M&A activity as sellers change their expectations in light of a higher interest rate environment. As such, we expect to be an active acquirer in this environment. In conclusion, we had a solid third quarter with excellent operating performance, delivering profits and cash flow ahead of expectations and sales in line with expectations. Despite the short-term macro outlook, we believe Novanta's long-term strategic positioning continues to be extremely strong and we're staying the course on executing our strategy and capital deployment model. With that, I will turn the call over to Robert to provide more details on operations and financial performance.

Thank you, Matthijs, and good morning everyone. Our third quarter non-GAAP adjusted gross profit was $105 million, corresponding to a 47% adjusted gross margin, compared to $102 million, or a 46% adjusted gross margin in the same quarter last year. For the quarter, adjusted gross margins increased year-over-year by over 160 basis points and sequentially by 30 basis points. This result exceeded our expectations and reflects strong execution by our teams. The gross margin expansion in 2023 is primarily driven by the successful deployment and adoption of the Novanta NGS productivity tools in our factories. Achieving a 47% gross margin positions us well to meet our full-year goal of a 100 basis point expansion in gross margins. Regarding operating expenses, R&D costs were around $22 million, which is about 10% of sales. SG&A expenses for the third quarter totaled $40 million, or roughly 18% of sales. Overall operating expenses as a percentage of sales were consistent year-over-year. We continue to invest in product innovation and prepare for several new product launches while also demonstrating strong cost management. Adjusted EBITDA for the third quarter was approximately $52 million, with a 23.6% adjusted EBITDA margin, up from $49 million the previous year. For taxes, our non-GAAP tax rate for this quarter was 15%, differing from the statutory rate due to the jurisdictional mix of income and timing-related tax benefits. Our non-GAAP adjusted earnings per share was $0.85 this quarter versus $0.81 in the same quarter last year. The third quarter operating cash flow was about $45 million, an increase of over 200% compared to last year. We are pleased with this outcome, which reflects strong profitability and progress in reducing our inventory levels. We ended the quarter with gross debt of $357 million, down from $413 million in the second quarter of 2023, resulting in a gross leverage ratio of 1.8 times. Our net debt stands at $281 million, placing us in a strong position for potential acquisitions. Now looking at backlog and bookings, our team successfully reduced our past-due backlog to customers by more than 24% sequentially, while still maintaining a backlog of $536 million, nearly twice our pre-pandemic coverage levels. The remaining past-due backlog is now minimal, and we have begun focusing on reducing lead times and improving on-time shipments of new orders to historical levels. The book-to-bill ratio for the third quarter was 0.8, aligning with our expectations. In terms of our operating segments, I’ll begin with the Precision Medicine and Manufacturing segment for the third quarter, which demonstrated strong overall financial performance, with solid gross and EBITDA margins, despite lower-than-expected revenue growth. The segment saw a year-over-year growth of 1%, lower than anticipated due to delays in purchases from industrial customers caused by higher interest rates and geopolitical disruptions. The book-to-bill for this segment was 0.72 in the third quarter, reflecting a normalization of lead times as customers adjusted their backlog coverage to pre-pandemic levels, along with some reduced demand from the life science and precision medicine markets due to the interest rate environment. Within precision medicine, new product revenue held steady at 20% of sales in the third quarter. Design wins in this segment decreased year-over-year due to timing and challenging comparisons from previous quarters. Nevertheless, we still anticipate solid design win growth between 10% and 20% year-over-year for 2023. We are encouraged by progress with key strategic customers, including recent milestones in next-generation lithography applications. The adjusted gross margin for the Precision Medicine and Manufacturing segment was nearly 52% this quarter, an increase of 180 basis points year-over-year. We commend our manufacturing operations teams for their performance and for embracing the Novanta growth system. In the Robotics and Automation segment, we saw a revenue decline of 15% year-over-year, consistent with our expectations. This decline was largely driven by significant year-over-year decreases in microelectronics applications, especially in our PCBA mechanical via hole drilling applications, which dropped over 70% and are now at negligible sales levels for the company. Additionally, as mentioned in our last call, this segment was affected by weak sales in industrial robotics primarily due to conditions in China and slowdowns in automotive manufacturing. The overall book-to-bill ratio here was 0.79, influenced by the declines in microelectronics and industrial demand in China. In a positive note, our ATI business had a book-to-bill above 1 in the third quarter, suggesting stabilizing demand in industrial robotics. New product revenue accounted for roughly 10% of total sales in this segment this quarter. This measure is lower than in 2022 because it now includes new product sales from our ATI business, which had a dampening effect on the overall segment ratio. The adjusted gross margin for the Robotics and Automation segment was approximately 51%, remaining stable sequentially and improving by 200 basis points year-over-year. We are pleased with the progress made by our teams through adopting the Novanta growth system, which has led to improved margins, shorter lead times, and better product quality, even amidst declining revenues. An indication of their progress is the rare preferred supplier rating achieved from a top five medical customer. Lastly, in Medical Solutions, we noted a revenue growth of 14% year-over-year, stronger than our expectations. This growth is fueled by an increase in elective surgical procedures and strong performance from our JADAK business line, which has improved following the resolution of supply chain challenges. The Medical Solutions segment had a book-to-bill of 0.87 in the third quarter, with bookings up 2% year-over-year. The Vitality Index in this segment decreased versus last year, now sitting in the mid-teens percentage of sales, aligning with our expectations. As discussed in prior earnings calls, this decline was largely due to our first-generation smoke evacuation insufflator product reaching its four-year mark. We anticipate this metric will rebound in 2024 with the launch of our second-generation smoke evacuation insufflators and new endoscopic pumps. Design win activity was robust in the third quarter, driven by significant wins in the minimally invasive surgical space related to our next-generation insufflator technology and integrated operating room technology products with a leading OEM. Overall, our business performed as expected this quarter, showcasing the talent of our teams in managing various challenges amid a rapidly changing economic landscape. We are proud of our team's achievements. Now regarding guidance, although we are entering a more uncertain demand environment with historically high backlog coverage, we are collaborating closely with our customers to schedule shipments that prevent inventory buildup and align with their market demands. We believe this strategy will help avoid unnecessary revenue volatility in the future and keep our revenue aligned with market needs. This approach is incorporated into our fourth-quarter revenue guidance, which we expect will yield book-to-bill ratios similar to the third quarter. We still project growth in our medical end markets, despite experiencing some temporary weakness in precision medicine and life science markets primarily due to the interest rate environment. While we expect to see some customer deferrals emerge in the fourth quarter, we maintain confidence in the long-term secular demand in these markets and anticipate increased demand from new product launches in the latter half of 2024. Notably, there is strong customer interest in our second-generation smoke evacuation technologies, a new endoscopic pump platform, integrated operating room technology platforms, and new optical subsystems for precision medicine customers, including spatial genomics and bioprocessing applications. Therefore, we are continuing to invest strategically to better position ourselves in these growing markets. In our advanced industrial markets, which account for over 40% of total sales, global purchasing manager indices remain below 50, indicating contraction in industrial capital spending. We are now in our fourth consecutive quarter of PMIs below 50, driven by a cyclical downturn in microelectronics and macroeconomic weaknesses in China that started in the third quarter of 2022. Overall industrial capital spending decelerated further in the third quarter of 2023 following a substantial hike in interest rates, particularly in the U.S., along with additional issues in China. As we approach the fourth quarter, geopolitical tensions have escalated, particularly in the Middle East, resulting in a further slowdown in industrial spending as manufacturing customers defer purchases and continue to grapple with increased interest rates. While signs suggest potential stabilization in capital spending by year-end after five quarters of contractions and stabilization of interest rates at elevated levels, the ongoing volatility in the macroeconomic and geopolitical landscape, combined with our business lead times, necessitates a downward revision of our fourth-quarter financial expectations. For fourth-quarter 2023 revenue, we anticipate GAAP revenue in the range of $208 million to $212 million, reflecting an approximate 5% year-over-year decline. For the full year, we now project GAAP revenue between $878 million and $882 million, indicating low single-digit growth, which is below our prior expectations for the second half of 2023. Nevertheless, discussions with our customers suggest this is a temporary demand deferral, highlighting the importance of focusing our resources on markets that are more secular and less cyclical. On a segment basis, we expect the Precision Medicine and Manufacturing segment to report flat to a 4% decrease in organic revenue year-over-year in the fourth quarter. Despite certain areas performing well, demand deferrals in industrial and some life science applications are impacting fourth-quarter growth. While near-term demand remains softer than expected, customer engagement, especially around new product launches, remains robust, and design win activity is on the rise. The Robotics and Automation segment is expected to see a year-over-year decline of 9% to 14% in the fourth quarter, primarily due to the ongoing pause in industrial robotic spending, especially in China, and continued weakness in microelectronics. Signs of demand stabilization are emerging, but the higher interest rate environment must normalize for a complete recovery. Finally, we anticipate the Medical Solutions segment will achieve year-over-year revenue growth of 4% to 6% in the fourth quarter, aligning with global surgical procedural growth rates. Customers in this segment are urgently working to accelerate and finalize launches of new technologies, particularly the second-generation smoke evacuation technology and new innovations in their product portfolios. Overall, we expect our medical technologies to spur strong customer demand, leading to revenue growth in the mid-teens for the full year 2023. For our overall adjusted gross margin, we anticipate a fourth-quarter margin of around 46.5% to 47%. Segment performance will primarily reflect changes in sales volume, but overall margins should meet or exceed our full-year expectations for 100 basis points of improvement year-over-year. For the full year 2023, we estimate adjusted gross margins of approximately 46.6% to 46.8%, demonstrating our team's effective implementation of the Novanta growth system. Looking at R&D and SG&A expenses, we project them to reach about $64 million to $65 million in the fourth quarter. The year-over-year increase in these costs is driven mainly by rising labor costs, additional investments in our innovation pipeline, and enhancements to our commercial efforts, particularly in precision medicine applications. Depreciation is expected to rise from about $3 million in the third quarter to approximately $3.7 million in the fourth quarter due to investments in our facilities. Stock compensation expense, estimated to be about $6 million in the third quarter, will remain consistent in the fourth quarter. For adjusted EBITDA in the fourth quarter, we expect a range of $42 million to $45 million. For the entire year, we anticipate adjusted EBITDA between $193 million and $196 million. Interest expense, nearly $7 million in the third quarter, is expected to decrease to about $6.5 million in the fourth quarter, owing to the rise in interest rates, partially offset by reductions in our debt balances. We remain focused on debt repayment to mitigate the impact of rising rates. Our non-GAAP tax rate is anticipated to be around 18% for the fourth quarter, with an expected full-year rate of approximately 16%, which aligns with 2022. Diluted weighted average shares outstanding are projected to be around 36 million, and for adjusted diluted earnings per share, we expect a range of $0.59 to $0.66 in the fourth quarter. For the full year 2023, adjusted earnings per share is now anticipated to range between $2.98 and $3.05. We expect cash flows to remain strong in the fourth quarter as we continue efforts to reduce inventory levels and benefit from robust customer collections. Additionally, our new optical subsystem manufacturing facility in Manchester, UK, and our medical consumables manufacturing facility in the Czech Republic are on schedule for timely completion. Despite slight shifts in some launch dates, we face ongoing pressure to expedite our readiness to meet customer demands, which includes finalizing these facilities and qualifying our products for upcoming launches. Anticipated new revenues are tied to the launch of our second-generation smoke evacuation insufflators, new precision medicine products, and next-generation lithography applications. This guidance does not assume any significant changes to foreign exchange rates. To conclude, Novanta's third-quarter 2023 performance was strong, characterized by excellent execution from our teams. We surpassed our expectations for margin expansion, profitability, and cash flow. Growth in our medical end markets helped counterbalance increasing softness in industrial markets, further highlighting the resilience of our diversified business portfolio. Despite a challenging interest rate environment and macroeconomic pressures, we are confident in our ability to navigate short-term obstacles while pursuing a growth strategy. Although industrial capital spending remains in contraction for a longer period than typical down cycles, our business continues to perform relatively well. While we do not expect a significant worsening or improvement in the economic climate in the coming quarters, our long-term growth prospects remain strong and are expected to accelerate with exciting new product launches in the latter half of 2024, supported by our positions in high-growth end markets in both medical and advanced industrial applications. We are immensely grateful for the exceptional performance of our employees and their contributions to our success in this dynamic environment. We deeply appreciate our customers' trust in our capabilities to meet their needs and support their innovations. We look forward to fulfilling our commitments to our employees, customers, and shareholders. This wraps up the prepared remarks.

We will now begin the question-and-answer session. Our first question comes from Lee Jagoda of CJS Securities. Please go ahead.

Hi, good morning.

Good morning, Lee.

So just, I guess starting with you had referenced that there's this temporary push out or deferral and customers are sort of leaning on you to carry their inventories, at least temporarily. Should we view this as a one-quarter push and something as simple as when the calendar flips, they'll be back to ordering and taking product? Or is there something else in the macro that we have to keep an eye on and it could be a multiple quarter push out?

I think there's a little bit of an overreaction by some customers in the fourth quarter to deal with the rapid rise in rates and the uncertainty in the environment. Obviously, the war in the Middle East sent some shivers through people's backs that they needed to adjust for or they felt the need to adjust for. So I think the fourth quarter definitely has a more deferral than what we would expect in 2024. So I do think things will begin to recover a little bit as we get into 2024. I think customers are really looking and taking the opportunity to focus in on those product launch cycles and really make sure that they're successful in the back half of the year. So even today, we have customers in our facility going through the qualification of product launches to make sure that those things are on track and to make sure that we're taking the necessary actions to ramp up to the volumes that they're looking for. But most of that is looking at as a second-half pickup in demand associated with those innovations.

Okay. And then specifically on the microelectronics business, I know you've won a whole bunch of stuff in EUV and deep EUV that should kind of drive multi-year secular growth. Can you give us some sense of the timing of those new products coming online during '24?

Yes. Well, first of all, we're extremely excited about this development. We feel even more confident about the long-term potential and growth in this application. You know, there were some public remarks by, I would say, a major player in this industry and our customer, which indicated a slight shift in their demand profile in 2024 from, let's say, early 2024 to more later in 2024. So this is more of a timing thing than a fundamental thing. And actually, as a matter of fact, we feel more confident as we're solving a pretty big problem for our customers. So, slight shift towards the latter part of 2024, long term even more excited about this opportunity.

Matthijs, if you would maybe just spend a minute or two on the problem you're solving and why the Novanta solution is the right solution in the area of microelectronics to solve this problem?

I need to be cautious about this, so I'll provide a broader perspective. When we say Novanta delivers critical technology solutions for our customers, it means we fundamentally address or enhance throughput. This results in a higher level of parts produced per time unit, yield, or cost quality. Essentially, we improve their ability to produce things that haven't been done before. This solution encompasses all three aspects and has a significant impact on end users by improving yields, productivity, throughput, and uptime. We are very optimistic about it. This is a typical Novanta solution that we also apply in robotics, broader material processing, and DNA sequencing. We enable productivity enhancements for both end users and customers. For instance, in DNA sequencing, we're significantly lowering the cost per test and genome due to our core engine integrated into those applications. The trend and approach are quite similar across various applications and customers, highlighting our essential and unique role in their supply chains. The examples we provide generally reflect these themes and solutions working in parallel, which is why both we and our customers see value in it, along with the end users.

The only thing I would add there is that we have used an acquisition strategy as well to acquire in technologies that allow us to redefine the competitive landscape. And so, as a consequence, we don't offer solutions that a competitor can match. We offer solutions that we've uniquely combined through a number of different acquisitions that our competitors haven't even thought of or looked at, that allows us to really offer a solution to a customer from their lens, from their eyes. And so, I think that's ultimately been the big differentiation that we've had, is that we don't offer solutions based on the widget that we offer. We offer solutions based on what the customer is looking to solve.

Got it. And just, I guess one more and I'll hop back in queue. As it relates to M&A. You kind of teased we'll see something before year end. Can you give us any framework around you know size, mix of business that you're looking at? Anything to kind of lead us down a path in terms of what you're looking to acquire at this point?

Yes, I think what we've said is that, listen, we're leaning into these macro trends that we've discussed, right? The overall growth framework is we get more content and solve more unique ways of solving our problem. Like what Robert suggested, right in his previous remarks into these high-growth applications. And so, of course, you know, we have had a tendency over the years to be more geared towards medical end markets as well as growing advanced industrial end markets, robotics and automation. So, you can expect us to continue to lean into those trends and further enhance, I think, our exposure into those end markets. As a reminder, 60% of our business is now or close to is in medical end markets. That's up from, I would say, mid-single digits 10 years ago. That's both organically as well as through acquisition, and we like that general exposure. So, let me leave it at that.

Okay, thanks very much.

Thanks, Lee.

Hi, thanks for taking the questions.

Hey. Good morning.

Good morning. Robert, you said and I just kind of missed all the context, but you said acceleration in 2024 potentially. Can you just restate that and elaborate on the drivers that you're talking about at the moment?

Yes, so I would say regardless of how the market performs, our second half of the year of 2024 will be accelerating on the back of new product launches. So, we have a number of customer launches that we've talked about in the past. We have launches now associated with our second-generation smoke evacuation platform. There are a handful of customers launching products in the back half of 2024 around that. We have customers looking to launch and ramp as Matthijs just spoke about our next-generation lithography solutions. And we have a couple of new design wins around integrated operating room-based technologies and some precision medicine-based technologies. So, a lot of these things were meant to be spread out across 2024. I think what we're looking at now is a little bit more of a backend loaded 2024 as a consequence of people really taking the time to make those launches successful. The urgency around customers has increased to make sure they're successful, to make sure that we don't have slips as we launch the products, make sure there's no quality fallout, to ensure supply chains are in the right places in order to meet their needs, and ensure our facilities are there, and that there are enough people to handle it, and so forth. And so that's the activity that we're really looking at. Obviously, in this uncertain environment around the macro, geopolitical, and interest rates, it was easy for a lot of customers to take a pause for the remainder of the year, but that is not an indication of them taking a pause in their innovation. Their innovation is clearly accelerating, and they want to make sure it's done right. And so we're expecting the ramp-up in the second half of the year.

Got it. Okay. And that's what I thought you were saying, that maybe it's a little more back-end loaded and this is all related to the $50 million in incremental revenue opportunity. I guess that's part of what you're talking about. It sounds like this is even broader, considering that some other projects are moving from the first half of '24 to the second half as well.

Yes, that's correct. And some additional stuff too. So, we are basically, yes we call that Brian, our new product Super Cycle because there's a lot of different products and application launches coming together later in 2024 and 2025. So, you know, the message is, listen, we got a short-term macro that is a bit more of a temporary headwind, but we're staying just razor-focused on these new product launches with our customers that really drive our long-term growth. So that's the upshot.

Got it. And looking at the gross margin and you're really having a good year in terms of gross margin this year, how much can you tell us about 2024 in terms of gross margin? Because you have this project that's this transition of the consumables manufacturing that should get you a healthy margin boost next year, I think. And can you talk about the timing of that? And you know, is it going to be tough to get 100 basis points of gross margin in 2024 after such a solid step up in 2023?

I don't think so. I think we'll be able to still expand gross margins, another 100 basis points. You know, I think obviously, you know, there'll be a little choppiness in the quarters as a consequence of new products being launched and the mix ratios associated with that. You know, you rightfully point out that the consumables are at a lower gross margin than the rest of the business. However, there are other parts of the business. A lot of our new product innovation is being launched at a 50% or greater gross margin. And so, that mix effect will be choppy throughout the year, but overall for the full year, we should be able to expand the gross margin to 100 basis points, all else being equal. Now, obviously, if we do an acquisition that can change things, but you know, for the most part, the base businesses, their performance, particularly as they have been really embracing and institutionalizing the NGS process, I think that gives us the confidence that they can continue to deliver these results.

Yes, in addition, I think Brian, what we said in the prepared remarks is that we'll also continue to apply 80-20 portfolio management tools, which is basically rationalizing our portfolio, focusing for gross margin and profitability as well as creating the capacity for growth, right? So that we basically phase out lower margin, less productive products that are either commoditized or more end of life. So that's another aspect that is an ongoing process within the company that we're looking specifically in 2024 to execute on.

Okay, are we seeing the benefit from that consumables transition already or is that something that is really just going to be felt in the first half of '24?

Yes, first and second half of 2024, so the products start ramping, full production will probably go roughly around the end of December. So the full effects of that really won't be felt until 2024. And then the launch cycle around the production of the medical consumables will be very customer-specific. And so, it depends upon how customers want to stock safety stocks around that. It depends on how their qualifications work out, their FDA processes. And so, the full effects would really be in the back half of the year is the easiest way of thinking about it, where we start all new products, all new medical consumables are launched out of that facility. Now, similarly, in our Manchester facility, we will be launching all new products out of that facility as well. So, that facility will be up and running really by the end of the first quarter, fully in production phase. And so, products will be coming out of the second half out of that facility, again putting us in a great position to deliver a higher gross margin.

Yes, and then you have in some of the other product categories more and more intelligent subsystems, which, you know, have a higher margin profile as well. Also that will launch in the second half. So think about laser beam steering or precision motion related intelligent subsystems, right, that are starting to gear up in the second half of 2024 as well.

Okay, thanks for answering those questions.

Absolutely.

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

Thank you, operator. So, to recap, Novanta had a solid operating performance in the third quarter of 2023. We beat our own expectations for margins, profit and cash flow, and saw solid sales in medical markets, helping to offset declines in industrial markets. We've maintained a robust level of backlog coverage while reducing our past-due backlog, and we see continued tailwinds in our medical businesses that should help partially mitigate growing pressures in the industrial capital spending. We're progressing our innovation pipeline and are excited for the large product launches happening later next year. Novanta remains very well positioned in the medical and advanced industrial end markets with diversified exposure to long-term secular microtrends in robotics and automation, precision medicine, minimally invasive surgery, and Industry 4.0. In 2023 and beyond, we will continue to focus on executing our new product Super Cycle, design wins in high-growth applications and doubling down on the Novanta growth system, driving cash flows and gross margin expansion. In closing, as always, I would like to thank our customers, our employees, and our shareholders for their ongoing support and commitment and continue to be impressed and specifically grateful for the dedicated efforts of all our Novanta employees, who work diligently every day to tackle new opportunities, manage through new challenges, and make Novanta 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 fourth quarter and full-year 2023 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.