Novanta Inc

NASDAQ:NOVT

Earnings Call Transcript 2021-Q1

[Operator]

Good morning everyone. My name is Jimmy and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated First Quarter 2021 Earnings Conference 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 [Operator Instructions] Please also note this event is being recorded.

At this time, I would like to turn the conference call over to Ray Nash, Corporate Finance leader for Novanta. Sir, please go ahead.

[Ray Nash, Investor Relations]

Thank you very much. Good morning and welcome to Novanta's first quarter 2021 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 am now pleased to introduce the Chief Executive Officer of Novanta, Matthijs Glastra.

[Matthijs Glastra, Chief Executive Officer]

Thank you, Ray. Good morning everybody and thanks for joining our call.

Novanta delivered outstanding results in the first quarter of 2021. Our teams executed very well and we delivered above our expectations for revenue, profit and cash flow. We delivered all time highs for revenue and bookings and excellent operating performance with adjusted EBITDA growth of 18% and free cash flow growth of 30% year-over-year.

Our company delivered approximately $163 million in revenue representing 5% year-over-year revenue growth on a reported basis and 1% growth on an organic basis versus a strong first quarter of 2020. This is the highest ever single quarter sales for Novanta which comes from the strength of rebounding markets and exceptional execution by our teams as I'll speak to momentarily.

We are extremely pleased with how our teams drove exceptional operating performance using the Novanta growth system tools. In the first quarter we expanded adjusted the EBITDA margins by 200 basis points year-over-year to an adjusted EBITDA of $33 million, or 20% of sales. Adjusted diluted earnings per share was $0.58, which is up 14% versus 2020. And our team's delivered strong free cash flow performance in the first quarter of 2021 of $20 million, up to 30% year-over-year at a ratio of over 175% of GAAP net income. All-in-all very strong results.

We saw record bookings momentum in the first quarter with sequential bookings growth of 28% versus the fourth quarter of last year and year-over-year bookings growth of 25% versus the first quarter of 2020. We saw booking strength across all our businesses with every unit having positive book-to-bill in the quarter.

In the first quarter, our overall book-to-bill was 1.27. We saw very healthy momentum in many of our advanced industrial applications and also across multiple regions. As we indicated in our last earnings call, the industrial and electronics markets are leading a very strong recovery for Novanta.

Now let's turn to what we're seeing in our markets, in the first quarter of 2021, 55% of Novanta's total sales went into medical applications. Overall, sales to medical applications declined 1% versus a strong first quarter of 2020 and as a consequence of the continued deferral of elective surgical procedures. During the quarter hospitals continue to have their focus on dealing with the winter surge in COVID cases and consequently, capital investments have not yet returned to growth.

Looking forward to the remainder of 2021, overall, large medical OEMs are increasing their demand as surgical procedure volumes are beginning to show momentum and multiple application areas are now positioning for a strong market rebound.

Key applications such as DNA sequencing, integrated operating room technologies and lab diagnostics are showing strong sequential growth. We're seeing good order growth in surgical robotics and we are expecting our MIS business to pick up steam as well in the second half. All of this is letting to our view that medical sales should return to growth as we progress further into the year barring any further setbacks in the global recovery from the virus.

November sales to advanced industrial applications were 45% of total sales in the first quarter. In the quarter, our sales continued to rebound across multiple application areas with sequential growth of 12% and year-over-year growth of 12%. We also continued to experience higher demand specific to micro electronics investments in 5G high speed networking and cloud-based infrastructure as well as higher demand from EUV-based applications.

We expect to increase microelectronics demand that we saw in 2020 to be sustained throughout 2021. From a regional perspective, our China sales grew over 40% year-over-year in the quarter with Europe returning to mid single digit growth. As we look forward to the rest of the year, we expect 2021 to be a strong growth year for Novanta. We will be reinstating full year guidance given our confidence in our 2021 outlook.

In this guidance, we are including effects of material and part shortages as Novanta is not immune to these. In some areas, we see the challenges and risks increasing despite the incredible work from our supply chain manufacturing and commercial teams. However, despite these challenges, we expect a very strong year and expect high single digit to low double-digit growth for the year and Robert will share the details on this later.

Now let me touch on some of Novanta's strategic growth metrics. Our fatality index, which is revenue from new products launched in the last four years continues to be healthy at above 25% of our sales for the first quarter. We have stayed the course on our innovation investments through the pandemic and this decision is starting to bear fruit.

In the first quarter of 2021, we launched five new products and we are well on our way towards 25 launches for the full year, which is double the number of launches in 2020 with multiple new products in the queue for the remainder of the year with focus on industrial and surgical robotics, minimally invasive surgery, precision medicine and diagnostics and industry 4.0.

Let me touch on two of these launches. One product in our precision motion segment is Aura which expands your product portfolio of ultra small, precise and easy to install optical encoders for industrial and surgical robotic applications. Another example within our photonic segment is MOVIA a compact laser beam steering scan app and intelligence subsystem is opening new application areas for us within marketing and coding, converting and other high volume material processing applications.

We are excited about all of these products you'll see a healthy up tick in technical evaluations requested by existing and new customers. Design wins in the first quarter more than doubled versus the prior year with multiple wins in most of our businesses and some large significant wins in several target applications in our minimally invasive surgery business. We expect to continue momentum with our design wins however the magnitude of the growth this quarter will be more normalized during the remainder of the year.

Moving on to other updates, the deployment of the Novanta growth system continues to develop nicely. The results of the Novanta growth are already appearing in our financial results, as evidenced by the gross margin expansion of over 150 basis points, reduced inventory and strong cash flow in the first quarter of 2021. We are very pleased with how our teams have leaned in to adopt this common way of working and we see excellent opportunities during the rest of 2021 and beyond to continue to transform our operations and customer engagement using the Novanta growth system.

We also continue to work at making Novanta an employer of choice in the marketplace. We continue to offer strong incentives and competitive compensation for our teams, including another broad-based equity grant made in April 2021, which is similar to the old employee grant we made last year during the pandemic.

In addition, we are actively engaged with further inciting throughout the organization the Novanta way, which is our common company culture. We believe this common culture will drive significant employee engagement and help maintain low employee turnover despite the obvious challenges caused by the pandemic.

In addition to this, Novanta published its first ever environmental sustainability and corporate governance or ESG report in the first quarter, which includes multiple topics including Diversity, Equity and Inclusion or DE&I in our workforce, environmental protection and product quality and safety.

At Novanta, it is our vision to build a culture that is welcoming for a broad representation of background where everybody feels respected, included and feel they can succeed. We strongly feel we need to do our part in being a responsible corporate citizen. A few this first report is a good first step in explaining what we're doing now and what our priorities are for the future.

Finally, we continue to be active in the M&A market acquisitions are the primary focus of our capital deployment provided the targets fit our stringent financial returns as strategic criteria. We continue to work on a very active pipeline of opportunities, and we feel good about the progress we're making in this area.

In summary, our first quarter played out better than expected with record sales and bookings and excellent operating results. We feel good about our long-term strategic positioning in both medical and industrial applications with long-term secular trends in robotics and automation, healthcare, productivity and precision medicine. And we are confident in our outlook for the year, the strong sequential and year-over-year growth. We feel good about entering this recovery with a strong innovation pipeline and balance sheet.

So with that, I'll turn the call over to Robert to provide more details on our financial performance. Robert?

[Robert Buckley, Chief Financial Officer]

Thank you, Matthijs, and good morning, everyone. I'll start by giving some details about the performance of our operating segments.

Starting with our photonics segment, for the first quarter of 2021, our revenue was up 6% year-over-year, and up 16% sequentially from the fourth quarter. This strong performance reflects the rebound in advanced industrial applications, which is giving us confidence and a positive outlook for this segment for the remainder of 2021. Throughout the first quarter and now also into April, May we have seen significant booking activity from our customers indicating further growth in the applications which we serve.

Bookings in the first quarter were up 29% year-over-year and we're up 12% sequentially. The book-to-bill was an impressive 1.21 in the first quarter. The innovation pipeline of our photonics segment is having good success so far with multiple new product launches underway. These launches will help us gain share in adjacent high growth application areas such as via-hole drilling for 5G mobile devices, laser additive manufacturing, battery processing for electric vehicles, fine material processing and micro machining for industrial and medical applications and high speed automation and processing of sustainable packaging known as the converting applications.

New product revenue stayed strong at greater than 20% of sales in the first quarter. In total, MPI sales were up 19% year-over-year. Design wins were up 30% year-over-year in the quarter. And finally, sales to customers in China had more than 50% as we continue to see strong momentum in our photonics products in the China market.

Turning to our precision motion segment, this segment saw 16% year-over-year revenue growth in the fourth quarter of 2021. With bookings growing 46% versus the prior year, sequentially sales were up 8% and bookings were up 26%. The book-to-bill ratio precision motion was 1.36. The first quarter continued to show sustained strong demand for microelectronics applications including investments in 5G, EUV and cloud-based infrastructure. These trends continue to remain robust as we look out for the rest of 2021.

In addition, we saw further strength in the robotics and automation space, both with existing customers and new product introductions. The medical portion of this business is also showing signs of a rebound as bookings from our surgical robotic customers are starting to come back.

Within the precision motion segment in the first quarter new product revenue grew by more than 20% and now make up strong double-digit percent of total sales for the segment. Design win activity in the segment was excellent and more than doubled in the quarter versus the prior year. And finally, the segment experienced another strong quarter of more than 50% growth year-over-year from the customers in China.

Turning to the vision segment, this segment predominantly serves the medical end market and saw revenue declined 2% year-over-year versus a very strong first quarter of 2020. But sequential revenue growth was up 6% as we've mentioned previously, our large medical OEMs are working past a temporary pause in demand growth corresponding to the rise in COVID hospitalization rates that persisted for most of the first quarter and the resulting deferral of surgical elective medical procedures.

We continue to expect demand to remain pause in the first half with a second half recovery happening as the world economies continue to rebound, and most importantly, elective surgical procedures rebound.

Despite the near-term pause and sales bookings in the vision segment grew 46% sequentially, and 12% year-over-year. From the book-to-bill in the quarter was 1.27. The vitality index in this segment remained about 30% of sales, with new products being a key driver for the resilience we have been seeing in this business. Design win activity was especially good in the quarter more than tripled the amount of activity from the prior year. At the minimum invasive surgery business closed on some significant wins with several large medical OEM customers.

This is a huge accomplishment and further solidifies the exciting growth prospects of this segment over the next several years as we start to see these design wins flow into our sales figures.

Finally, we're very pleased with our detection and analysis business which continued solid performance in the first quarter. This business unit primarily serves the diagnostic testing and patient monitoring applications with RFID, barcoding and machine vision technologies. This business continues to benefit from the rapid uptake in PCR and molecular testing as well as patient monitoring equipment purchases tied to the pandemic.

I'll now move on from our segments to discuss other operating results for the overall company.

We delivered 163 million in revenue in the first quarter of 2021, an increase of 5% year-over-year on a reported basis an increase of 1% on an organic basis. As Matthijs already mentioned, this represents our highest ever single quarter of sales as a company. And we were extremely pleased with this result which beat our own expectations and our previously issued guidance.

Turning to other operating results our first quarter non-GAAP adjusted gross profit was 73 million or 45% of sales compared to 67 million or 43.3% in the first quarter of 2021. In the first quarter adjusted gross margins increased 170 basis points year-over-year and were up 70 basis points sequentially. The strong result was in line with our expectations, and comes as a result of the ongoing work from our operating teams that drives the Novanta growth system deeper into our day-to-day work.

In addition, the performance was realized despite the continued pressure from high operating costs in our factories that were caused by the pandemic. We are assuming grateful for our teams who continue to successfully operate our facilities during the pandemic. And we feel we can keep managing these incremental costs and challenges are still driving additional gross margin expansion during the rest of 2021.

Moving on to operating expenses, first quarter R&D expenses were nearly 19 million or roughly 11% of sales compared to 15 million or 10% of sales in the first quarter of 2020. We continue to have confidence in our innovation pipeline and therefore will continue to invest into the economic climate. We are already seeing the benefits of these investments as evidenced in our product launches and our strong design win activities so far this year. And our view has not changed that we have significant near term opportunities to take market share and win customer platform.

First quarter SG&A expenses were 32 million or 19% of sales compared to 31 million or 20% of sales in the first quarter of 2020. Our SG&A expenses were better as a percentage of sales despite the return of incentive compensation plans in 2021, which has been cancelled in 2020.

Moving on to other financial results, GAAP operating income was 11 million in the first quarter of 2021, compared to 13 million in 2020. Non-GAAP operating income in the first quarter was 23 million or 14% of sales compared to 21 million or 14% of sales in the prior year.

Adjusted EBITDA was 32.7 million in the first quarter of 2021 or 20% EBITDA margin, compared to 27.6 million in the first quarter of 2020 or an 18% EBITDA margin. Our adjusted EBITDA performance beat our expectations in our previously issued guidance mainly driven by the stronger sales performance flowing through the profit.

On the tax front, our GAAP tax rate was negative in the first quarter of 2021. It differed from the Canadian statutory rate of 29% driven mainly by jurisdictional mix of income, along with a significant windfall benefit from the equity compensation, which correlates divesting of the February 2021 of the all employee equity grant we issued in 2020.

On a non-GAAP basis, our tax rate in the first quarter was 3%. This differed from the statutory rate, again, driven largely by jurisdictional mix of income and the windfall benefit from the divesting of the equity compensation.

The effect of the windfall benefit would be muted as the year progresses. Our GAAP diluted earnings per share was $0.32 in the first quarter of 2021, compared to $0.34 in the first quarter of 2020. On a non-GAAP basis, adjusted earnings per share was $0.58 in the quarter compared to $0.51 in the first quarter of 2020. The favorable result of our adjusted EPS was driven again by strong profit from higher sales and also a more favorable tax rate than we expected.

First quarter operating cash flow was 23 million compared to 18 million in the first quarter of 2020, a 31% increase year-over-year. This good result was driven by strong profit and by sustained improvements in our net working capital, which is being driven by the deployment of Novanta growth system throughout the organization.

And finally, we ended the year with gross debt of 196 million and our growth leverage ratio of 1.6x. Our net debt was 82 million as of the end of the first quarter of 2021.

Turning now to guidance. As we look at the second quarter, we continue to see strong demand from the advanced industrial sector with capital spending continuing a strong recovery. For medical applications, so far, we are seeing similar dynamics in the first quarter with moderated demand but we are growing more confident that we will see a solid recovery in this sector in the back half of the year.

With this promising demand profile, it's very clear that the limiting factor in the near-term will it be safe supply chain disruptions caused by electronic material shortages, which are now being widely reported on. The effects of supply chain disruptions in both with Novanta supply chain and the supply chain of our customers, which we are part of.

When it comes to our supply chain, our teams have been extremely diligent at addressing any potential material shortages or delays. In the first quarter, we were largely successful in containing any issues and finding ways to mitigate any risk we saw.

As we've continued into the second quarter, we have seen some of these dynamic and more complicated, frequent and uncertain, which is making it more challenging to mitigate. This is and we expected to remain for the remainder of 2021, our single largest challenge across the company.

That being said, it's clearly a temporary situation. And despite the situation we feel we have much better visibility to not only the second quarter, but the rest of the year. And so we're now be reinstituting our full year guide for Novanta's results in addition to our guidance for the second quarter.

Starting with the second quarter of 2021. As we stand here today, we expect GAAP revenue in the range of 162 million to 165 million. We are expecting to see strong year-over-year improvement in revenue. The range itself is governed by the material availability as well as possible disruptions with our customers production processes from their own supply chain challenges. It is not driven by demand, which is continuing to remain very robust.

On a segment level, we expect strong growth in photonics and precision motion segments whereas vision will continue to experience moderation in demand one more quarter.

Moving on to adjusted gross margins, we expect gross margins in the second quarter to be up 200 basis points versus prior year and roughly flat sequentially. This improvement will continue to come from our ongoing productivity programs and cost leverage from higher volumes.

R&D expenses in the second quarter be approximately 18 million to 19 million, which is similar to the first quarter. SG&A expenses for the second quarter will be approximately 31 million to 32 million also similar to the first quarter. Depreciation expense which was about 3.3 million in the first quarter of 2021, it'll be similar in the second quarter, and amortization expense which is 6.6 million in the first quarter will be similar in the second quarter.

Stock compensation expense, which is about 6.6 million in the first quarter will be closer to 5 million in the second quarter. For adjusted EBITDA, we expect a range of $32 million to $34 million.

Interest expense which is about 1.4 million in the first quarter 2021 is expected to be similar in the second quarter. We expect our second quarter non-GAAP tax rate to be around 19% absent significant changes and jurisdictional mix of income or other variability in any of our eligible tax benefits. This is a step up in the first quarter due to the timing of the windfall benefits from stock compensation mainly impacting the first quarter.

Diluted weighted average shares outstanding for the second quarter will be approximately 36 million shares. For adjusted diluted earnings per share, we expect the range of $0.49 cents to $0.53 in the second quarter.

Turning now to full year 2021 guidance, as we stand here today, we expect GAAP revenue in the range of 645 million to 655 million. It is fair to say that the current level of customer demand we are seeing is at or above the upper end of our range. But as we've mentioned, our range includes the risks we are currently seeing in our supply chain at this time.

Moving on to adjusted gross margins, for the full year 2021, we remain committed to delivering upwards of 150 basis points of gross margin expansion in 2021. Driven by continued progress in our Novanta growth system productivity program, strong cost controls and better volume. R&D expenses for the full year 2021 will be approximately 11% of sales. This level of spending reflects the continued investment we're making to execute on our new product launches for this year, as well as continuing to pursue new design wins with our key customers.

SG&A expenses for the full year 2021 will be approximately 19% of sales, which is roughly flat to the prior year. Depreciation expense will be roughly 13 million for the full year 2021 and amortization expense will be roughly 26 million. Stock compensation expense will be roughly 21 million for the full year of 2021. This is slightly below 2020 levels but higher than it was historically, which comes as a result of new equity grant in 2021, which Matthijs mentioned in his remarks.

For adjusted EBITDA, we expect the range of 127 million to 134 million for the full year of 2021. Similar to sales, the upper end of the range is where profit should be if we mitigate the cost around the supply chain disruptions. Interest expense will be approximately 6 million for the full year, we expect our non-GAAP tax rate to be around 15% absent significant changes in the jurisdictional mix of income and as another variability of any of our eligible tax benefits.

Diluted weighted average shares outstanding being around 36 million shares for the full year and adjusted diluted earnings per share we expect in the range of $2.04 and $2.19 for the full year of 2021. We expect capital expenditures to be around 20 million during 2021.

As always, our guidance for both the second quarter and the full year do not assume any significant impacts from foreign exchange changes.

In conclusion, we are extremely pleased with the result from the first quarter, especially the record levels of sales and bookings. We are confident that the full year 2021 will shows a strong organic growth, growth margin expansion and a record number of new product launches. We’re made very proud of the performance of our employees and their tireless efforts to help us be successful in a challenging environment and most importantly, remain excited about our future and look forward to continue to deliver on our commitments to our employees, our customers and our shareholders.

This concludes the prepared remarks, we will now open the call up for questions.

[Operator]

Ladies and gentlemen will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Lee Jagoda from CJS Securities.

[Lee Jagoda, CJS Securities]

So I guess it sounds like within your guidance for the year, you're basically saying that demand is outstripping supply with the headwind being the supply chain. And some of the shortages you're seeing in certain products, if it weren't for the headwind of supply chain, and you were actually able to produce to demand, how does that change the or how would that change the revenue guidance given the top-end now is implying roughly 10% or 11% year-over-year growth for the full year?

[Robert Buckley, Chief Financial Officer]

Yes, so I would say it obviously, what we gave in our prepared remarks is that, the upper end of the range is where we're seeing demand currently. And in fact, bookings continued at this pace will probably exceed that number from just a pure demand profile perspective. So it would say that, not only is our supply chain, but the supply chain of our customers is really kind of governing the growth right now.

[Lee Jagoda, CJS Securities]

Okay. And then just the same kind of question around margins, you're saying, these 150 or 200 basis points of -- 150 basis points plus of gross margin expansion expected this year? How much you think that's being held back by supply chain issues? And either inflation or just the inability to get supply?

[Robert Buckley, Chief Financial Officer]

I would -- the 150 basis point expansion is driven net of all those things. And so effectively, what you're trying to get at is, could you expand margins higher, the short answer is yes. That they would go up higher than that, absent those effects. I don't want to get into kind of specifics, but it is certainly our ability to continue to expand above that level, is currently there, it's just dealing with these changes, were a little reluctant to go out there and get over the end of our skis.

[Lee Jagoda, CJS Securities]

Yes, that's fair enough. And I have one more, and I'll hop back in queue. If I look at the bookings numbers, is any of that? Or can any of that be attributed to customers front-end loading bookings because they're either scared that they can't get supply or are just over ordering? And if that's the case, are you able to kind of lock them into terms that are more favorable to you, just in case things get delayed or cancelled along the way?

[Matthijs Glastra, Chief Executive Officer]

Yes. Lee, at least in our case, we don't see customers front end loading, we really see the industrial side coming off pretty soft, last three years, right with trade wars and then COVID. So you really see economies really opening back off and particularly industrial customers, yes, seeing the demand and seeing that activity. So we don't see any general kind of build up or anything.

On the medical side, I think it's fair to say that orders are coming in. But we do expect that order pattern to actually continue as well. And let's say the remainder of the year. So in short, we don't really see the kind of front end loading now. When shortages continue, we're taking a very critical look, we're very close to our customers, we know what the inventory levels they're sitting on. And rest assured we will not let that go out of control.

[Operator]

Our next question comes from Richard Eastman from Robert W. Baird.

[Richard Eastman, Robert W. Baird]

Maybe a little bit of conversation or discussion, maybe just around the cadence of orders to revenue in the vision business. And is that, how do you feel about that? I think you referenced that maybe the second quarter in might be still a bit softer, year-over-year. But then we see growth in the back half of the year. And is that just to speak to the cadence there of orders for revenue recognition, if you would?

[Robert Buckley, Chief Financial Officer]

Yes. I mean, listen, I think there we have seen in parts of our vision segment we have seen a little bit more challenging, let's say areas for supply. And so that that impacts some of the sequencing overall, I think the orders do reflect I think a positive outlook of our customers. And also, we've commented in the past that is single quarter order pattern can sometimes be a little bit lumpy. So I would say those three effects, I think they feed into what you're seeing in terms of findings of bookings versus revenue. So, if anything, it gives us a good, let's say confidence that vision will pick up in the second half of the year.

[Richard Eastman, Robert W. Baird]

Was there growth in the consumables piece of vision versus the equipment side? Is it still the equipment side that's down meaningfully?

[Matthijs Glastra, Chief Executive Officer]

Yes. We didn't comment on that. I would just say that the remarks that renewables follow, I think the generic remarks that we made, what we basically saw in our MIS segment overall is that, yes, the lockdowns were pretty hard right, especially in the latter part of last year, and the first part of this year. And I think only recently started to reopen. And you can kind of see that in the remarks made by, let's say, large medical OEMs. That only towards the latter part of the first quarter, they're starting to see some recovery. And so basically, towards us, we're trailing that by a good 90 to 120 days, right. So that's basically what you're seeing. But right now we do see them, ordering starting to order more. And therefore, that feeds into our confidence for the second half, the first half will still be a little bit soft.

[Richard Eastman, Robert W. Baird]

Okay. Yes. Fair enough. Just maybe my last follow up question here, around China and regional growth there. I mean, you did speak to 40% plus growth in China? Presumably, that's led by the advanced industrial product lines. Is there any change on the medical side? Or is that quite small in China?

[Robert Buckley, Chief Financial Officer]

Medical is still fairly small for us in China, to be very honest, so are the OEMs that we deal with are mostly Western OEMs on the medical side. Now, having said that, we do see Chinese OEMs starting to ramp and rest assured, we are, of course engaged there. But that business for us is still fairly, fairly small. The majority of our China growth, right now is photonics and precision motion driven and it's about 50:50. So I think what is encouraging, is that of course, last year, the growth in China was primarily precision motion driven on the back of 5G, infrastructure and PCB demand. This year, it's more balanced with our photonics business doing really a stellar job there and gaining share. And of course, on the back of markets that are very buoyant, as well. So we like, let's say our performance in China and we are continuing to invest in local sales teams, local manufacturing and even engineering the answer to kind of get more of a local for local presence there. So yes, you can expect us to lean into the local Chinese market.

[Operator]

And our next question comes from Brian Drab from William Blair.

[Brian Drab, William Blair]

In terms of capacity utilization, can you talk a little bit about where you're at? I mean, you're achieving record level results and forecasting to go above and beyond that, and just wondering, are you able to find the people you need as you head in that direction?

[Robert Buckley, Chief Financial Officer]

Yes, so first and foremost, I mean, capacity utilization typically is a term that's used when you have like a big fabs and that kind of stuff. So basically for us it's materials and labor and the main gating item as we as we highlighted is actually the material, also it is basically our supply chains not able to follow what is unprecedented rebound right that is across the board. And then, of course, having both at the same time in demand and the supply shock right because the you see some shocks in the supply side too. So that's really more gating. I won’t say anything else. Of course we are very active in making sure that yeah, we're getting the labor in that we need. First remember, growth system helps there as really leaning out our production floor so we get more out per area. But I would say the main message here is that the supply chain is gating our growth more than anything else.

[Brian Drab, William Blair]

Okay, thanks. And then, the precision motion gross Margin was a little lower than I was modeling photonics was a little above. I know you made some comments around this. I think some of it has to do with supply chain. Can you just talk about why that might be? Maybe it's just because I modeled incorrectly? And then, how do you see the gross margin for the segment's progressing as you move through the year?

[Robert Buckley, Chief Financial Officer]

Yes, I mean, you didn't really get the model correctly, I do think it came in a little lower than we're expecting some of that was the expediting fees, and some inefficiencies in our labor production as a consequences of material shortages. We did overall able to mitigate for that elsewhere. So it's not always we're able to mitigate it per se in a specific business segment. But we are able to work it out across the overall organization.

So I do think some of the things with [temper] [ph], we have gotten some of the material and now to deal with our second quarter. And we should be able to hold a better gross margin profile as we get into the second quarter. But that short-term in the first quarter was really tied to that.

[Brian Drab, William Blair]

This level in photonics, I think was a little over 49% gross margin in the quarter. Is that sustainable? That was a little better than I was expecting.

[Robert Buckley, Chief Financial Officer]

Yes, I hope so. It's a short answer. I mean, some of that is -- it's tied to the NGS process, where we really kind of leaned out the production processes and got better efficiency around that. I think that team has done a better job in mitigating their supply chain disruptions. And so they've been able to get the right sort of materials in advance. It took some of the warnings in the fourth quarter to heart.

And I also think that from a level loading perspective, they've been able to plan well ahead of time. There is some expansion going on there right now, we are expanding our optics facility in the U.K. I'm not expecting any major disruptions from that. And in fact, that should really kind of enable us to continue to expand that gross margin. But the short answer is that should hold for now.

[Operator]

[Operator Instructions] And I'm showing no additional questions. We'll end today's question-and-answer session. I'd like to turn the floor back over to Mr. Matthijs Glastra for any closing remarks.

[Matthijs Glastra, Chief Executive Officer]

Thank you, operator. So to summarize Novanta's performance in the first quarter of 2021 was excellent. We had record sales and bookings and beat around expectations for profit and cash flows, our innovation programs are healthy and progressing. And we launched five new products in the quarter and are on track for our ambitious plans to launch 25 new products throughout the year, which is double last year's.

We saw tremendous growth in design wins and feel confident that we're succeeding at growing our presence in our target application areas. We're excited to see the rebound happening in the global economy and particularly in the advanced industrial sector with a return to growth also in the horizon in the medical sector. Novanta is well positioned in the sectors with diversified exposure to long-term secular macro trends and robotics and automation, precision medicine, minimally invasive surgery and industry 4.0.

In closing, I would like to thank our customers, our employees and our shareholders for their ongoing support. I'm particularly grateful for the dedication and strong contribution of our teams of committed Novanta employees who have rapidly pivoted and are again showing up and serving our customers during one of the strongest recoveries ever experienced.

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 second quarter 2021 earnings call. Thank you very much. This call is now adjourned.

[Operator]

Ladies and gentlemen, with that will conclude today's conference. We thank you for attending. You may now disconnect your lines.