Novanta Inc.

Good morning. My name is Gary and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Incorporated's first quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to send 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 first quarter 2025 earnings conference call. This is Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthias Blaster, 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.novanhurst.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 Chair and Chief Executive Officer of Novanta, Matthias Klostra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Noventa achieved a successful first quarter of 2025, hitting our expectations for sales and profit, continuing our organic growth path, and delivering strong cash flow performance, all while effectively navigating a challenging environment. In the first quarter, we delivered $233 million in revenue, which represents organic growth of 2% and reported growth of 1%. Our orders grew 3% year-over-year. Adjusted gross margins were 46% in line with expectations and adjusted EBITDA was $50 million. We generated over above $32 million of operating cash flows in the quarter, continuing our streak of delivering strong operating cash flow conversion of above 120% of net income for the eighth consecutive quarter. These strong results reflect the strength of Noventa's business, culture, and team. I am especially proud of our team's resilience and disciplined execution in this volatile environment, while deeply embedding the Noventa growth system in our culture. In addition to our strong financial performance, I'm pleased to announce the successful closure of a small strategic token acquisition at the start of April, marking our first acquisition of 2025. we continue to work on a large pipeline of additional acquisition opportunities, which remains a top priority for Noventa this year. Before I dive into the market environment, I want to emphasize that Noventa's diversified business model with more than 3,000 customers with exposure to high-growth medical lifestyles in advanced industrial markets has consistently demonstrated resilience across various geopolitical and macroeconomic scenarios. Our strategies focus on winning in markets with long-term secular fill-in, such as precision robotics and automation, advanced minimally invasive and robotic surgery, and precision medicine. Many applications within these markets are still in the early stages of their adoption cycles, offering significant long-term growth potential. We forge deep and long-term partnerships with leading OEM customers in these markets, addressing their most challenging problems with our innovative proprietary solutions and technologies. Our asset-like business model drives high cash flow conversion and growth, which we reinvest in the business and acquisitions, creating long-term, sustainable, and consistent cash flow growth and shareholder value. In short, we see that our winning growth strategy, focused on where we play and how we win, and our deployment of an event-to-growth system is what drives our performance no matter the environment. With that said, let me make a few comments on the market environment and how event-to-growth is responding to the dynamics we see. Our social healthcare markets continue to thrive with strong patient procedure growth and hospital spending driving high single-digit growth in our advanced surgery business. We expect to grow faster than the healthcare market in 2025 from new product launches within surgical robotics and minimally invasive surgery applications. These products are quickly adopted because they enhance patient safety, improve surgical throughput, and help meet new regulatory requirements. We are reconfirming $50 million of incremental new product revenue for 2025, predominantly driven by our next-generation smoke evacuation program, interplayers, and next-generation endoscopic pumps. In addition to strong new product launches within our medical devices markets, we're also seeing strong demand for new product launches supporting so-called physical AI applications, such as warehouse automation, precision robotics, humanoids, RFID, and EUV lithography solutions, and other technologies that support a nearshoring of manufacturing. we're confidently pushing forward with our investments in innovation and commercial excellence in these markets. Despite this backdrop of strong secular growth drivers, in the near term, it's fair to say that the macroeconomic environment we're dealing with today is one of the most uncertain and volatile that we've seen since the early days of the COVID pandemic. Since our last fall, trade war uncertainty and tit-for-tat retaliatory responses romantically escalated. Besides the timing of tariffs, their resolution or retaliatory responses are largely unknown at this point. This will certainly drive reluctance by our customers' customers to make capital investments, which results in poor visibility for our OEM customers, particularly in industrial and life sciences markets. November has responded well to similar situations in the past and is even better prepared today. Over the past few years, we have enhanced the scalability and resilience of our operations as a supply chain, reduced reliance on Chinese imports, and strengthened our In China for China strategy, including local fees for flight chains and $50 million in locally manufactured product revenues. This has laid a foundation that we can use to accelerate further manufacturing network optimization. In recent quarters, we also strengthened our organization and leadership. For example, our new co-chief operating officer roles allow us to respond to these situations in a more cohesive, nimble, and rapid way. In the first quarter, we onboarded a new global ad of supply chain with deep expertise in our markets, technologies, and an event-to-growth system. Additionally, we welcome the new global hand of the November growth system who brings with him best-in-class experiences and training from then and are afforded. So while the trade and pair of changes in place right now have currently increased our manufacturing costs by approximately $20 million annually, we expect to mitigate this impact through a multi-pronged strategy that allows us to still maintain our full year 2025 EBITDA guidance, we issued in February of this year. Robert will go into further details on our approach shortly. While addressing short-term tariff mitigation, we remain steadfast in our focus on our top three priorities for Noventa in 2025, as discussed in our last call. First, rent or plan new products and achieve the $50 million of growth from new products this year. Second, deliver strong profit margin and cash flow performance by driving the Noventa growth system deep into our culture and operations. This now includes implementing a sound response plan to counteract error headwinds and market demand disruptions. And third, acquire additional companies that fit our strategy and attractive returns and in a manner that evolves our portfolio to secular growing and resilient markets and business models. Now I'll return to the first quarter to give more details on our results and our strategic growth metrics. In the first quarter, medical market sales made up 55% of total and event sales, and event industrial markets made up 45% of total sales. Sales to both end markets grew low single digits year over year. Despite the short-term uncertainty in the industrial space, we remain confident in our long-term exposure to sexually growing issues in the Zen market. Noventa is positioned in many attractive applications and enabling technologies, supporting the so-called physical AI applications, in ensuring a near-suring of manufacturing, which is driving robotics and automation investments, particularly due to labor costs and labor shortages. Many of these applications and enabling technologies are still in the early stages of their adoption cycles, offering significant long-term growth potentials, of mid-to-high single-digit organic routes. In the first quarter, we saw a solid design win activity, particularly in our automation-enabling technology segment, where design wins grew by strong double digits as customers proceeded to work on next-generation platforms despite the market turbulence. Some examples of recent design wins include warehouse automation robotics, All right, by these solutions, advanced semiconductors, laser additive manufacturing, micromachining, and also humanoid robotics. Also in the first quarter, new product sales grew a strong double-digit year over year, and our vitality index climbed to just below 20% of total sales. With the anticipated ramp of new products, we expect these metrics to further improve over the course of the year. To highlight a few new product examples for you, first, all major customers have now launched their second-generation smoke evacuation inflator products with favorable market reception. The market reception, regulatory drivers, customer orders, and customer engagement of these products gives us confidence these new products ramps are on track despite the turnover in trade. Next, we're very excited about recent launches that further expand our lead at ultra-precise, high-density, and high-safety motion control and sensing product lines targeted at warehousing automation and humanoids, where Noventa has unique proprietary technologies. Examples include our Denali AdWords Safe Server Drives, which enable embedded safety of precision robots in warehousing automation and humanoids at industry-leading power densities. We're also excited by their next-gen Axion Vero four-store sensors with excellent noise immunity and high stiffness, providing robots with a sense of touch which is critical in these applications. The benefits are smarter planning and reacting, faster motion via quicker response times, compression of goods to fill bins more efficiently, and the ability to handle cluttered, unpredictable environments. In April, Noventa acquired Kion, an integrated RFID solution provider based in Barcelona, Spain. Kion combines proprietary RFID hardware with AI-enhanced cloud-based software to offer real-time inventory and asset management. As a long-term Noventa customer, Kion is a market leader in providing resource cores and warehouses with precise location data within a means of accuracy. inventory traceability, and predictive insights, improving revenue, customer experiences, and profitability with reduced stock apps. This acquisition aligns with Noventa's strategy to expand into intelligent, embedded software-based subsystems and solutions. Keele marks a first entry into AI-enhanced cloud-based software integrated with proprietary RFID hardware, and fills a crucial software integration gap for better penetration into the medical market, including hospitals. This technology aims to improve traceability, reduce costs, enhance patient outcomes, and improve staff and patient experiences. While medical customers have longer design cycles, we are excited about POV impact on retail customers and expect rapid market adoption, driving double-digit growth. Though the near-term impact on the event of sales and profit is small, we anticipate significant contributions to overall growth from 2026 onwards. Looking beyond this transaction for 2025, acquiring new technologies and businesses remain a top priority for our team. We continue to have a large and exciting pipeline of additional targets. Valuations are more attractive, and we believe that the near-term macroeconomic environment is an added catalyst to increase actionability. Our pharmacy is well-positioned for additional transactions while maintaining our historical discount plan on both cash returns and financial leverage. To conclude, I'm very pleased with our first quarter performance. We met sales and profit expectations, exceeded cash flow expectations, and effectively navigated disruptive market events. We are well-positioned and are leaning in to seize new growth opportunities in 2025 amid trade uncertainty and volatility. Our new product brands are on track for 2025, and we're confident in achieving our goal of $50 million of incremental new product sales. With revenue expected to grow further in the following years. Additionally, this environment presents opportunities for attractive new acquisitions, as demonstrated by the key on acquisitions. With a stronger management team, a solid business foundation in the right markets, and an intact company strategy, I remain confident in our resiliency and ability to navigate the near-term dynamics. With that, I'll turn the floor over to Robert to provide more details on our operations and financial performance. Robert?

Thank you, Ms. Hines. First quarter 2025 non-GAAP adjusted growth profit was $108 million, or 46% adjusted growth margin, compared to $107 million, or 46% adjusted growth margin in the first quarter of 2024. Adjusted growth margins per flat year-over-year in line with our expectations. For the first quarter, R&D expenses were $23 million, or approximately 10% of sales. First quarter S&A expenses were $46 million, or roughly 20% of sales. Adjusted EBITDA was $50 million in the first quarter, or 21% adjusted EBITDA margin, demonstrating growth of 1% year-over-year. On the tax front, our non-GAAP tax rate for the first quarter was 20% versus 16% in the prior year. Our tax rate increased year-over-year due to changes in jurisdictions, just a little mix of pre-tax income and Pillar 2 implications. Our non-GAAP adjusted earnings per share was 74 cents in the quarter, slash versus the prior year. Our free cash flow was a robust $32 million, exceeding expectations and demonstrating strong cash conversion capabilities from strong networking capital management. We ended the first quarter with gross debt of $392 million and with a gross leverage ratio of 1.9 times. Our net debt was $286 million, giving us a net leverage ratio of approximately 1.4 times. Following the Keyon acquisition, we expect our second quarter growth leverage ratio to be slightly above two times and our net debt leverage to remain below two. This gives a sample capacity for further acquisitions. In the first quarter, we also repurchased approximately $6 million worth of common share. Novanta's share repurchase strategy is focusing on acquiring the stock when the value of the stock is more attractive than both internal investments and acquiring businesses in our acquisition pipeline. Our methodology is based on a cash return on investment. In our view, the stock valuation is currently attractive, but we will continue to balance acquiring our stock with a strategy of maintaining enough cash to fulfill our acquisition strategy and expectations. For the first quarter, Novanta booked a bill with 0.88%. Bookings were up 3% year-over-year. We saw a slowdown in customer booking activity in the month of February due to increased short-term uncertainty caused by customers and global trade disruptions. While we expect the near-term ordering behavior for our customers to remain volatile, orders for the month of March and April did recover and climb both sequentially and year-over-year.

Now I'll turn to details of the operating segments.

In the automation enabling technology segment, first quarter sales grew by 5% year-over-year, driven by continued strength in the robotics and automation business unit. The book to bill in this segment for the first quarter was 0.90, and bookings were up 16% year-over-year. Adjusted gross margins in this segment were 49%, up 70 basis points year-over-year, driven by favorable product mix and strong productivity in our factories. Design wins in this segment were up strong double digits year over year, driven by good execution in our sales teams to win new sockets and upcoming customer platforms. New product revenues also grew strong double digits year over year, and the vitality index was in the mid-teens percent of sales, up versus the prior year and in line with expectations. The medical solutions segment experienced a revenue decline of 3% year over year, The organic decline was caused by sales decline of a precision medicine business unit which serves the life science market. This market experienced both disruptions from tariffs and a significant disruption from funding cuts of the U.S. National Institute of Health, which allocates out more than $40 billion annually to the life science industry. While we expect uncertainty in life science to remain for the rest of the year, we are pleased to see strong double-digit growth in our advanced surgery business unit, partially offsetting the decline. Advanced surgery saw high levels of demand for minimum-based surgical equipment driven by both robust end-market dynamics and new product launches. The overall medical solutions segment saw a book-to-fill of 0.85 in the first quarter, and bookings were down 10% year-over-year, caused solely by our precision medicine business unit. However, the vitality index in this segment was nearly 25% of sales for the first quarter, showing strong double-digit growth in new product sales year-over-year. This reflects the ramp of our new product launches in the advanced surgery business unit. But just the gross margin of segments were 44% in the quarter versus 45% in the prior quarter. The decrease is mainly driven by product mix. Now turning to our outlook and guidance. Speaking first about tariffs and global trade disruptions, we see this situation impacting our business in three different ways. First, the impact of tariffs on supply chain, which increases the material cost of our products. Second, the impact of reciprocal tariffs from China on U.S. manufactured products shipped to China, which impedes our ability to economically ship products to Chinese customers from the United States. And third, the impact of weakness in global capital spending caused by the tariff uncertainty, which results in companies deferring investments. Starting with the impact on our supply chain, we believe we can largely mitigate and avoid these costs. We have calculated the growth annual impact as approximately $20 million of additional costs based on the tariffs currently in place. However, our teams have responded quickly and effectively with a playbook honed over the last five years. For starters, they pivoted to second-course vendors who are not subject to the tariffs. Second, we moved some manufacturing to other regions to avoid importing into the United States. Third, we worked with customs offices to implement duty exceptions and drawbacks And fourth, we implemented price increases and tariff surcharges to customers. The combination of these actions have both reduced the overall tariff cost to November by nearly 50% and have largely mitigated the remaining impact of tariffs on our profitability. The next topic is reciprocal tariffs from China on U.S. manufactured products shipped to China. Novanta ships approximately $45 million annually of products from our U.S. manufacturing facilities to Chinese customers. For the remainder of 2025, we were expecting to ship approximately $35 million of revenue to China from our U.S. factories. As of today, these shipments are on hold, and the revenue is deferred due to the magnitude of the tariff applied for our products, which exceeds 100%. However, we are aggressively working on mitigating this impact as quickly as possible and are making solid progress. For starters, we intend to accelerate our in-China, for-China manufacturing strategy, which means manufacturing products for the China market in China. Today, we have more than $50 million of products made in China for the China market, and we expect to double that in 2026. Second, we will establish duplicate manufacturing lines in our European manufacturing facilities. Shipments from European factories are not subject to reciprocal tariffs from China. Third, we are working with our customers to ship products to their non-tariff-based manufacturing centers. And fourth, we are working with customers on tariff exceptions and pre-trade zones to eliminate the impact on our customers. These actions are being taken to both mitigate the risk of reciprocal tariffs on the nearly $35 million of U.S. manufactured products shipping to China, as well as to de-risk the threat of potential reciprocal tariffs from Europe on roughly $250 million of U.S. manufactured products shipping to our European customers from U.S. factories. While EU reciprocal tariffs have not been implemented, we still feel shifting to a regional manufacturing model will permanently eliminate any further risks without materially impacting our overall costs over the long run. Many of the solutions to this challenge will take time to fully implement, but we've already begun this work and are seeing solid progress. To further accelerate our efforts and mitigate potential shortfalls in our progress, we have expected to implement proactive cost containment actions by the end of the second quarter. This program will target approximately $20 million of annualized cost savings to partially offset the profit impact of tariffs and custom revenue deferrals, as well as to accelerate our long-term manufacturing footprint strategy. And the final area we are focused on is dealing with the near-term weakness in global capital spending caused by the uncertainty from the trade war and the U.S. government spending cuts. Since June of 2022, much of the manufacturing capital spending markets have been in a recession. As such, our cost structure and our operating model have already been adjusted for this new environment. We will continue to focus on embedding the demand-to-growth system deep into our culture and our way of working to generate productivity, to decrease complexity, and to accelerate our strategy. Also, we will continue to focus on innovation by launching new products to generate demand in a weak spending environment. Our customers recognize that even in weak spending environments, new products that dramatically improve productivity, safety, quality, and create breakthrough innovation for their customers will generate demand. We also continue to invest in less capital-sensitive markets, such as the medical device market and software. And we are leveraging our acquisition model to acquire new businesses to accelerate these efforts. Taking into consideration all these factors, let me now share guidance. For the full year of 2025, we remain confident in our strategic response plans and mitigation efforts, which positions us to navigate uncertainty and volatility effectively. Our focus on delivering on our profit commitments and driving long-term growth remains unwavering. Based on this, we reiterate our full year 2025 guidance for adjusted EBITDA. However, given the heightened uncertainty and volatility, we are in an environment that makes long-term revenue predictions challenging beyond the second quarter. As such, we will only be issuing quarterly revenue guidance until visibility improves. For the second quarter of 2025, we expect gap revenue in the range of $230 million to $240 million, which represents a year-over-year change for reported revenue of down 2% to up 2%. This range is much larger than we would normally guide purely because of the potential for further disruptions caused by the current environment. However, it's important to highlight that as of today, our revenue is currently forecasted at the top end of this range.

And if the environment does not change maturely from today, we would expect to remain there.

As Matthias mentioned, we are excited to see that several of our end markets have demonstrated solid growth right now despite the market dynamics. We see this especially in medical devices, semiconductor equipment, and certain precision robotics categories. The trends in patient procedural growth and healthcare remain robust, and investments in AI remain strong, and some of the trade disruptions are even driving more investments in robotics and RFID to allow customers to better adapt to the changing dynamics. This is a testament to our diversified and resilient business portfolio and our focus on high-growth sector growing and markets. At the segment level in the second quarter, we expect the automation and enabling technology segment to range from flat to low single-digit decline year over year, driven by a deeper decline in precision manufacturing, as that business unit is more immediately impacted by the trade conflict between U.S. and China, partially offset by continued growth in robotics and automation. Our medical solutions segment is expected to show low to mid-single-digit growth, as we continue to ramp new products in the advanced surgery business. We also expect to see some sales benefits from the Keon acquisition in the second quarter, but the range is hard to quantify at this point. This will be partially offset by continued weakness in core precision medicine products selling into life science. Moving on to adjusted growth margin for the second quarter, we expect to be approximately 45.5% to 46.5%. While moving quickly to protect margin and profit with tariff response playbook, our efforts will be partially limited in the second quarter by the timing of when these actions take full effect. We expect R&D and SG&A expenses in the second quarter to be approximately $68 to $70 million. Depreciation expense, which was approximately $4 million in the first quarter, will be similar in the second quarter. Stock compensation expense, which was $7 million in the first quarter, will be approximately $9 million in the second quarter. The increase in the quarterly stock compensation expense is driven by retention and incentive equity grants associated with the key-on transaction, as well as the in-quarter impact of a one-year $15 million grant, which cliff-sets in 12 months, that we are issuing as part of our tariff response playbook. For adjusted EBITDA for the second quarter, we expect a range of $50 to $55 million. This range includes the estimated impact of cost containment actions that I've outlined. Interest expense, which is slightly below $6 million in the first quarter, will be roughly $6 million in the second quarter, inclusive of the impact of the new borrowings of the Keyon acquisition. We expect our non-tax rate to be 22% in the second quarter. The tax rate is in line with prior guidance. The diluted weighted average shares outstanding will be approximately 36 million shares. The diluted earnings per share, we expect a range of 68 cents to 78 cents in the second quarter. Finally, we expect second quarter cash flow to remain strong and also achieve a similar or better rate of cash conversions to that of the first quarter. And as already mentioned, we expect a gross debt leverage to be slightly higher above two times and a net debt leverage to remain below two times, putting us in a solid position to execute additional acquisitions this year. As always, this guidance does not assume any significant changes to foreign exchange rates versus the end of the prior quarter. However, given the current recent volatility in foreign exchange markets, the impact of exchange rates may have a more meaningful positive impact on our reported revenue results than we have experienced in the past. In summary, we remain focused on our priorities, executing our tariff playbook, and continue to work diligently to support our customers with the successful launch of multiple new product platforms this year. In addition, the fundamentals of our business remain strong. The long-term strategy and business models remain intact. And we are focused on attracting an array of long-term high growth and markets. Our diversified portfolio is giving us resilience. We believe we have the strongest management and operational teams in decades, with strong and proven playbooks for successfully navigating uncertainty. And with the new hires to support and institutionalize and advance the growth system operating model, we believe we are well-positioned to navigate the uncertainty and seize opportunities in this market. as the company remains focused on controlling what we can control and executing with excellence on our strategy and top priorities, no matter what the market environment brings. This concludes our prepared remarks. We'll now open the call out for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your questions, please press star, then two. Our first question today comes from Lee Chagoda with CJS Securities. Please go ahead.

Hi, good morning.

Good morning, Lee.

So just starting with the acquisition, it looks like the upfront payment is around $75-ish million, including the stock portion. Can you kind of give us a little sense for the potential revenue contribution or a trailing revenue number? And then I assume it'll be dilutive in the short, short term to EPS, but how should we think about it from an EBITDA perspective?

We would expect it to be slightly accretive earnings per share in the first year. So it's a profitable business. It gets a little difficult to predict the actual revenue at this point. largely because of the ramp of project-based business that they currently have. So you're right, we paid around $66 million up front for the business. There's a $22 million earn-out, and there's some equity grants that were given as well to incentivize them that have longer-term cliff-setting associated with them. But I would say that, you know, the impact on revenue we're being a little careful about just because they've never been a public business, they've never closed quarters before, and they were located in an area where they haven't really kind of focused in on that. And so we're just being careful about that. But we do expect it to be a more material impact on revenue in 2026, and the possibility of it being more meaningful this year remains something that we're looking for in the second half of the year.

And to the extent you were a meaningful percentage of their cost of goods, can you talk to that? And then, I guess, are there other things that they bought from other vendors that you also supply that you can be more embedded with their technology?

Yeah, so I would look at it in strategic sense in two ways. One is they were a customer of ours, and so this does solidify the relationship that we have with them where we were supplying them with 14 components. into their markets. It obviously allows us to displace anybody else who's currently supplying them, and it allows us to better serve their existing customer base, which is strong and growing and doing quite well, and they've built significant backlog around it. The second is that it gives us the technology, particularly around their software, which is a cloud-based AI solution that allows us to implement a similar type of solution into some of our end markets, warehouse automation and healthcare. Now, it takes longer to do that in the healthcare market. Obviously, it will take a little bit longer to do that in warehouse automation, but it's a strong technology that's easily deployable given the application-specific nature of their technologies.

Got it. One more for me and I'll just hop back in. Just in terms of the $20 million in annual cost savings, can you kind of bucket that cost savings in terms of where things are coming from and how nimble you can be about reinstituting those costs if and when demand picks up? And I'm a little confused whether that was part of the discussion around tariff mitigation or incremental to that tariff mitigation process.

It's what gives us, so I would say $20 million gives us confidence that we will achieve the full year EBITDA numbers that we've already communicated back in February. So those actions allow us to really solidify that. Now, you're right in that there are a handful of actions that are deferrals of investments and prioritization around investments that we might add back if the environment materially changes or improves. But there are some actions embedded in there that are really pull-forwards of what we plan to do in future years. And the example of that being the regionalization of our manufacturing footprint. This is something that we have been planning on for some time. The environment gives us an ability to do that, which will allow us to permanently avoid any sort of trade disruptions on a go-forward basis once that structure is fully implemented. So the $20 million in annual cost savings will be full this quarter. We will execute on that. That will allow us to hit the EBITDA. There are some investments we'll put back if the overall business does a lot better than we were expecting or if the trade environment effectively calms down.

But I would say that, for the most part, we're looking at this as incremental savings. Got it. Thanks. The next question is from Brian Grabb with William Blair.

Please go ahead. Hi.

Thanks for taking my questions. Just one thing that I think that I missed. I just couldn't type fast enough. Did you say that you're trending toward the high end of the 2Q revenue guidance range?

Correct. Yeah. So we're currently trending.

at the 240 number. And I would say that our bonds roll off is sitting there right now. There's obviously just this morning an announcement of a possible reciprocal tariff from the EU, depending upon how negotiations unfold. And so just given the environment, we thought to provide a broader range with a little bit more downward bias than we normally would have done in a historical basis. And so I think that was a prudent call to make, but at the same time, I think it's wise to point out that we're sitting around the top end of the range right now. Got it.

And then can you talk a little bit more about which customers and end markets you're seeing the deferrals in? Where are you seeing most of those delays, either geographically or end market in applications?

Well, the most important one is, of course, the decurs of our U.S.-based production to China, right? That's the most significant element of what Robert, in his prepared remarks, stated. If nothing changes for the full year, that's a $35 million impact that we're just mitigating now. That might improve. Who knows? But that's, as of today, that is the single largest one. Then, you know, secondly, there is, you know, uncertainty because nobody knows what to invest where and when because the environment is not cleared up, right? So that in itself creates deferrals of investments. And those are particularly true in life sciences. which you can see in our precision medicine segment, as well as kind of the broader industrial space. And so that's basically what you're seeing. There's a small automotive bonus that we have within robotics and automation that, of course, is effective. So those are, I would say, widely publicized elements. Again, we're not losing any slots. Our customer relationships are strong. We're innovating and introducing new products, but our OEM customers have poor visibility right now, particularly in those two markets. On the positive side, we do see, again, in the advanced recovery market, really a buoyant and thriving market, and so we're doubling down there. And we see in our precision robotics and automation markets, which I highlighted, you know, warehouse automation and related semiconductor automation markets, and other related markets actually from some strong pool. And so we completely push there. So it really depends on the end markets, but, yeah, hopefully that provides some color.

Yeah, absolutely. Are you seeing – you said, I think, in the press release, and I can't remember because you said in prepared remarks, but the new product revenue is on the right track still – Are any of these customers, though, that you're launching those products with, are you going to see any deferrals of the launches or orders? No. Did we talk about the $50 million specifically today?

Yeah. Yeah, no, we did, Brian, in our prepared remarks today. I'm really happy to repeat that. I mean, the majority of, you know, as a reminder, the majority of these product revenues will be incremental $50 million today. are in the medical device and market. So that market is going. It's strong. And what we said is that actually the majority of these products have been introduced by our customers. The reception is very good. The orders are flowing. So we feel very good about these launches and the momentum. And in addition, and that's a smaller impact, but nevertheless, we're equally excited about that in the whole area of whereas automation and precision robotics, including what is still a small piece, humanoids, we have unique proprietary technologies. It's a very active market right now. And so we see potential there, particularly around the design wind side right now. Revenue is starting to kick in a little bit more meaningfully in the second half. But all in all, we feel good about the $50 million in the result because they're kind of in markets that have pool independent of today's insurgency.

Okay. And do you have – last question is this. Do you have any way of knowing how much of your revenue is directly and directly tied to NIH spending? Okay.

The way I would think about it is the precision medicine portion of our medical solutions has exposure to that market and has exposure to the sensitivities around NIH funding. It's obviously certain multi-omics markets are still in the research phase, things like even cellophane. some research investments. And so anything that's being, any funding is going predominantly to academia for research purposes and any sort of investments around that have been deferred at this time.

Yeah. Yeah. And on top of that, of course, related to the genomics market, you have some additional, I would say, dynamics in terms of China's blacklisting of a customer and there was already, before the NIH cuts, there was just a general lifetime capital spending pullback or at least hesitancy. And so, yeah, there were multiple dynamics that are on top of the NIH cuts that makes that a weaker than usual environment.

Right. Okay. Understood. I guess I'm just trying to figure out if this is you know, like 5% of revenue, you know, is there any way to try to help us with the sizing of it? I understand the markets that have the exposure, that's helpful, but any more specific sizing of it that you could give us?

Well, without, you can see the precision, take it as a perspective of the precision medicine business unit revenue. So, you know, arguably, You know, it's difficult to get an exact number, but it's because you're asking us to determine, like, what do our customers' percent of their revenue goes to academia? That gets a little difficult for us to have that sort of visibility. But if you just make the precision medicine business unit, you know, some portion of that. But, you know, I'm sure the decline right now is largely caused by that. A lot of lifetime customer revenue goes to either Europe or the United States. And so, sure, tariffs have an impact, generally speaking, when it comes to capital spending. But the bigger impact would be any sort of cuts in NIH funding or just the general disruption that that causes that industry and the referrals associated with that.

Yeah, that's awesome. Okay. Thanks very much.

Great.

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

Yes. Good morning, Matthias, Robert. Good morning, Rob. I just wanted to circle back real quick to make sure I'm clear on your discussion around tariffs. So the $20 million in annualized cost savings implemented by the end of the second quarter effectively, I guess, assumed tariffs. That $10 million of savings in the second half offsets what you have not already mitigated on the sourcing side. Is that correct?

Yeah, I would say that it's not so much on the sourcing. I think the sourcing piece of it we already have under control now. So I don't think we... we will need to take additional actions to offset any of the impacts associated with the sourcing. The teams have already mitigated half of the exposure. We are doing surcharges to our customers for some of the costs associated with that, but the teams are working pretty aggressively through a number of different strategies to mitigate it. So as it stands today, I would say that the impact of tariffs on our supply chain, which is effectively the 10% global as well as, the China tariffs, does not have a material impact on our profitability. The restructuring cost actions that we're taking are predominantly geared towards dealing with the lost profitability of revenue deferrals for our shipments from the United States into China. So there's roughly $35 million worth of product going into China from our U.S. factories and for the remainder of the year, and there's obviously a profit associated with that. If we're unable to mitigate a portion or a majority of that, the cost actions are in place in order to offset that and allow us to accelerate our efforts to permanently resolve that situation. Okay, understood.

Yeah, because it's important, Rob, that we're, of course, accelerating in mitigating the impact in region-for-region manufacturing. That was already a strategy that we had in place that we're accelerating. Of course, it takes a little bit of time to really fully enact that, and that timing, in fact, is really what we're mitigating.

Yeah, okay. Actually, that was a follow-up. Just, you know, to the extent you can add any more color there, You talked about expanding manufacturing, I thought, in China to serve that market. Would that be correct, or would you be serving it from outside or Southeast Asia, I guess, that region? And if you could speak to the level of investment CapEx around the entire effort, I guess, in the entire regionalization. Sure.

Yeah, let me speak about the boiler strategy, and then Robert can speak about the CapEx piece. I mean, listen, you and I spoke separately, Rob, that just consolidating our manufacturing base is a strategy that we were already pursuing, and that was to some extent in flight. You know, in the last few years, we've moved from suitable production kind of in China for China. We're more than halfway. We're accelerating the other half as we speak, right? So that's really what you need. So the other $35 million rate is going to go there and work in Europe and then to China. The second piece is that we had a manufacturing consolidation footprint strategy regardless or pre the tariffs that was already in flight. It still happens that we're just changing the order a little bit so that we're accelerating the in-region for region benefits. And so that's what we're doing. And so that's the second piece of it. And so we're consolidating production into a larger manufacturing site, which, of course, will ultimately improve scalability, resilience, but also has the benefit of being region for region. So that's really the plan that will be in flight. But, of course, yeah, it takes a little bit of time to enact all that, and it will not be before early 2026 when we see the benefits of that.

As it relates to CapEx, of course, there'll be a little bit of CapEx. We're thankful that most of our production processes are light assembly and tests. And so the vast majority of the CapEx is not related to facilities. So we have facilities that are in place today that we will just fill them up with volume. So most of the CapEx investments is associated with test stations and benchtops and things of that nature. So I don't believe it's going to be a large material item just because in general we're light assembly and test. And there's a reprioritization that has to go in place around the CapEx that we've already had planned. So I would say that it's in the envelope that we've already budgeted for the year. It's just shifting into the geographical locations that make sense. in order to enable us to do the regionalization. I see.

Okay. Just last question. Matthias, I thought I heard you make mention of within the new product ramps, also just around the semiconductor space, EUV in particular, but could you step back and maybe just comment on that market in particular, either on the EUV side or at one point we were starting to see some green shoots in some other areas, but I'm just just given all the dynamics of InfraQuartum, where that stands?

Yeah, yeah, so that's a multifaceted question. Let me start with the EUV side of things. Again, we're solving a major issue for our customer there, so it's a little bit independent of the exact market dynamics there, which long-term is super favorable there. And we're on track with some of the rest there in agreement with the customers. So that remains unchanged. And then as it pertains to the rest of the waver fact equipment or advanced semiconductor equipment market, I would say it's still modestly up and positive. Again, we're in next generation phase. and so there's a little bit of an uptick there. So the green shoes are still there. Maybe they're less high and a bit more cautious, but they're still up. So we still see a variable environment there, and we're leading into that a four-second change based on announcements that seem to change by the day. But that's the current stance as we see it today and what we're hearing from our customers. Okay. So that's still a positive outlook.

Very good. All right. Thank you. All right. Thanks, Rob.

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

Thank you, operator. So to recap, we had a successful first quarter of 2025. We hit expectations for sales and profit and continued our streak of delivering strong operating cash flow conversion. Our new product launches remain on track for 2025. We also completed our first acquisition of the year by closing the key on transaction. And we've quickly mobilized a strong response to the tariff and trade disruptions. On the whole, I'm incredibly proud of our team's achievements. Looking ahead, we remain focused on the top three priorities for 2025. First, wrap all our brand new products. and achieve our new product sales growth targets. Second, deliver strong margin and cash flow using the Noventa growth system, which now includes executing on our tariff response plan. And finally, acquire additional companies that fit our strategy at attractive returns. Noventa remains very well positioned in the medical and advanced industry land markets, with diversified exposure to long-term growth trends in precision manufacturing, robotics and automation, precision medicine, and advanced surgery. We feel that our winning growth strategy and our deployment of the Noventa growth system continuously improves our company operations. It will drive our performance no matter the environment. In closing, as always, I'd like to thank our customers, our shareholders, and especially our dedicated employees for their ongoing support. 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 in our second quarter earnings call. Thank you very much. This call is now adjourned.

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