Novanta Inc.

Morning, my name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Incorporated's second 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 or then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ray Nash, corporate finance leader for Novanta. Please go ahead.

Thank you very much. Good morning and welcome to Novanta's second 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 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 .novanta.com. Please note this call is being webcast live and will be archived on our website shortly after the call. Before we begin, we need to remind everyone of the safe harbor for forward-looking statements that we've outlined in our earnings press release issued earlier today and also those in our SEC filings. We may make some comments today both in our prepared remarks and in our responses to questions that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of this time. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of these forward-looking statements as representing our views as of any time after this call. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the investor relations section of our website after this call. I'm now pleased to introduce the Chair and Chief Executive Officer of NOVANTA, Mathias Quastra.

Thank

you, Ray. Good

morning, everybody, and thanks for joining our call. NOVANTA delivered solid second-quarter results meeting or exceeding expectations for sales, margins, and profit. Revenue reached $241 million, which represents reported revenue growth of 2% and organic revenue declines of 2% through passing guidance. New product revenue grew by over 50% year over year. Customer orders grew 10% year over year and 20% sequentially, reflecting a strengthening outlook. We also saw significant design win activity grow more than 150% year over year. Adjusted gross margins held at 46%, and adjusted EBITDA margin was 22%, both in line with expectations. These results reflect the strength of NOVANTA's business model, team, and culture, and the power of using the NOVANTA growth system to optimize company performance in a very fluid macroeconomic and trade environment. And I'm proud of the team's strong execution of our tariff response strategy. Our long-term growth strategy remains focused on winning in markets with long-term secular tailwinds, such as precision and AI-driven robotics and automation, advancement of the invasive and robotic surgery, and precision medicine. We built trusted long-term collaborative partnerships with the world's leading OEM customers by solving their most challenging needs with our proprietary technology solutions, securing up to 10 years of exclusive and sticky designing platforms. While our products typically represent no more than 10% of our customers' bit of material, they enable differentiation and innovation in their systems for their customers in terms of clinical outcome, throughput, yield, cost per procedure or part, or never before possible performance. In the last decade, our portfolio has evolved significantly. We've expanded into healthcare growth markets, which are now approximately 55% of our business. We have increased our recurring consumables revenue to approximately 15% of sales. And we have increased our revenue from intelligent subsystems with embedded software to approximately 30% of sales, which is margin-accretive for NOVANTA. We intend to continue to expand our portfolio into these areas. Now, let me provide an update on the customer demand and market dynamics that we're seeing. Our sales to medical device markets remain exceptionally strong with patient procedure growth rates, hospital spending, and our share gains, driving sustained double-digit growth in our advanced surgery business in the second quarter and year to date. Our new product launches in surgical robotics and minimally invasive surgery applications are ramping very successfully. These products are designed to significantly enhance patient safety, improve surgical throughput, and help meet new regulatory requirements as US states and countries around the world pass legislation regarding surgical smoke evacuation. NOVANTA is on track to reach $50 million of incremental new product revenue for 2025, mainly due to the strong outlook for the next generation medical devices. Rapid adoption of these products supports our confidence that the advanced surgery business revenue will nearly double by 2030, up from $200 million in 2024. Medical consumables, a strategic focus for NOVANTA, are expected to account for approximately 15% of sales in 2025 with ongoing double-digit growth rates. Our success stems from long-term innovation investment and strong customer relationships, and we believe we now have the expertise and scale to expand into adjacent recurring medical consumable segments. We're also very excited to announce two major design wins in the second quarter in the minimally invasive surgery market. First, we want a new product program with one of the largest medical OEM customers to develop a third-generation insufflator device and consumables, which will be launched in the next few years. This design win shows our strong long-term partnership with winning OEMs and our ability to provide leading edge innovations over multiple generations of our products. Second, with a separate medical OEM customer, we want to contract to develop a next-generation pump for their upcoming endoscopy tower. Our product will provide multifunctional pump capabilities, along with proprietary sensing and seamless integration with other devices on the customer's towers. This represents our second major win of next-generation pumps with more in progress. Moving on, our robotics and automation applications continue to see strong demand despite the global trade disruptions, as evidenced by the strong double-digit revenue growth in the second quarter. Growth in this business is driven by demand for a product that supports physical AI applications, such as warehouse automation, precision robotics, and humanoids. We expect sales into these applications to double in 2026 versus 2025, and then to double again in 2027. We believe these physical AI applications represent an incremental $1 billion addressable market for Novanta by 2030. To that point, we're excited to announce a significant contract signed in July with a leading e-commerce and warehouse robotics company. This represents a $50 million revenue opportunity over the next three years. Because of the timing, this design win will be included in our third quarter metrics, and revenue will start in 2026. Taking a step back, the warehouse automation space is booming because of AI, labor shortages, and latest advancements in physical AI sensor technologies. As a result, leading OEM players are aggressively deploying high conviction use cases. Novanta's proprietary technology offers precise touch and safe movement for robots, enabling smarter, faster, and more efficient goods handling, critical capabilities for modern warehouse operations. I'm also pleased to share progress in humanoid robotics. This emerging field is in early development, and we're collaborating with over 10 leading humanoid players across North America and Europe. We're working with these players on multiple slots with significant content. We hope to announce specific design wins in the future as this market matures, and these players finalize their product architectures. The same unique Novanta sensing and server drive capabilities that are used in warehouse automation and surgical robotics are also relevant in humanoid. So we have a competitive advantage with platform technologies relevant from multiple physical AI robotics applications. This advantage has been built up over years with a growth playbook, consistent investment in innovation, combined with in-depth application know-how, targeted acquisitions, and customer intimacy. Turning to other markets, sales to industrial capital equipment saw declines year over year. This market is mainly served by a precision manufacturing business, which was affected by the impact of trade disruptions on customer demand, particularly in China. However, revenue has now stabilized at this lower level, and bookings are rising at double-digit pace both year over year and sequentially as customer inventories are mostly depleted and visibility improves. Coupled with the new design, when it's more than doubling year over year for the second consecutive quarter, this positions as well for sequential revenue growth through the second half of 2025 and beyond. We're getting traction in additive manufacturing from medical and aerospace applications and applications supporting AI investments like advanced packaging and on-device AI computing, which demand extreme precision throughput and miniaturizations, areas where Novetta's scan-head subsystems excel. Also, as supply chains regionalize, we see growth opportunities in new markets such as India, where we are expanding our commercial presence and have had recent success winning new customers. Next in advanced semiconductor applications in the near term, this market continues to show mixed signals, but appears to be in the early phases of an upcycle, albeit at a slow pace. Our short-cycle sales are still strong on the back of capacity build-out for new data centers and other AI-related infrastructure. As for our new content in deep UV and EUV applications, we're shipping small amounts of early units and we will be ramping up as our customer ramps in the marketplace. We're designed in on an exclusive basis with this new content and we expect significant sales growth over the next few years. Finally, speaking to life science equipment markets, which is mainly served by our position medicine business, this area saw a -over-year decline caused by weekend market dynamics, including further disruptions at the US NIH and FDA, weak biotech funding, cutbacks in pharma K-PACs and trade disruptions. Due to these market disruptions, we're starting to see customers accelerate a replacement cycle away from barcoding and older instruments as they focus their new product development on more advanced technologies such as RFID and machine vision. Over the last two years, we've been aggressively shifting our product offering into these new technologies. For RFID, we feel that with the key on acquisition, we've successfully positioned ourselves at the leading edge of new RFID solutions offerings. And as for machine vision, we're happy to announce that in the second quarter, we entered into a new commercial partnership with a global leader in machine vision technologies to sell their embedded machine vision to OEM customers in the life sciences sectors. This partnership leverages our partners leading machine vision technology combined with Noventa's deep domain and application knowledge of medical and life science applications, including our ability to provide tailored support to our OEM customers. And so while the recent decline in revenue has been more than expected, we were encouraged to see our precision medicine business grow double-digit sequentially in the second quarter, largely because of our accelerated transition to these more advanced technologies. Based on this, we believe the revenue will stabilize over the next several quarters and expect it to grow sequentially the remainder of this year. We continue to believe in the long term secular opportunities in the life science equipment market. Early detection of root cause of disease will continue to be a big driver of productivity in the health care industry. And we will continue to execute our long term growth playbook in this market, albeit that in the near term, we're managing the profit flow through of this business and shifting our capital allocation plans. Now I'll provide an update on our acquisition activities. The key on integration is on track and the business performance is already beating our initial expectations. Our short time with this team has proven their leading expertise in software development and RFID technology solutions. And they also have succeeded at winning a large new customer, which we believe will offer excellent near term growth for the business, helping the second half sales outlook of 2025 with contained double digit growth in 2026. Looking beyond key on acquisitions remain a top priority for our team to continue to evolve our portfolio towards high growth medical, more recurring, consumable based and more embedded software and intelligent subsystems. We continue to have a large and exciting pipeline of targets. Valuation levels are more attractive when we believe that the near term macroeconomic environment is an added catalyst to increase actionability. Our balance sheet is well positioned for additional transactions while maintaining our historical discipline and both cash returns and financial leverage. You should expect us to lean in hard to pursue additional transactions in the second half of 2025. So to conclude, I'm very pleased with a second quarter performance. We met or exceeded our expectations for sales, margins and profit driven by double digit growth in our advanced surgery and robotics automation businesses underscoring our strategic focus on high growth markets and the diversity of our portfolio. Our new product launches continue to ramp and we remain confident in achieving our goal of 50 million incremental new product sales. We also have 10% year of year growth in bookings, which combined with the new product ramp sets us up for steadily increasing sequential growth in 2025. We're also well positioned for growth in 2026 based on multiple significant new design wins in high growth and markets such as minimally invasive surgery and also physical AI applications like warehouse robotics. And finally, the key on acquisition is off to a great start and we have an additional large pipeline of exciting, actionable acquisition targets. We remain focused on our top three priorities for an event in 2025. First, ramp all our planned new products and achieve the $50 million growth from new products this year. Second, deliver strong profit margin and cashflow performance. We're driving NGS deep into our culture and operations and successfully execute on our tariff response playbook. And third, acquire additional companies that fit our strategy at attractive returns and in a matter that evolve our portfolio to secular growing and resilient markets and business models. So with that, I will turn the call over to Robert to provide more details on our operations on financial performance. Robert.

Thank you, Matthias. Our second quarter 2025 non-GAAP adjusted gross profit was $111 million or a .1% adjusted gross margin compared to 110 million or .6% adjusted gross margin in the second quarter of 2024. Adjusted gross margins were down year over year, but flat sequentially and in line with our expectations despite the increased cost of tariffs. For the second quarter, R&D expenses were $25 million or approximately 10% of sales. Second quarter SG&A expenses, excluding ERP design costs, were $45 million or approximately 19% of sales. The ERP design costs in the quarter were approximately $1 million. Adjusted EBITDA was $52 million in the second quarter or 22% adjusted EBITDA margin demonstrating gross of 2% year over year. On the tax front, our non-GAAP tax rate for the second quarter 2025 was 21% versus 20% in the prior year. Our tax rate increased year over year mainly due to changes in jurisdictional mix of pre-tax income. Our non-GAAP adjusted earnings per share was 76 cents in the second quarter of 4% versus the prior year. Operating cash flow for the second quarter 2025 was $15 million compared to $41 million in the second quarter of 2024. The year over year decrease in operating cash flow was primarily driven by the timing of tax payments, an increase in inventory purchases to mitigate the global trade dynamics, which were at their peak in the second quarter, and from the acquisition of Keyon. We expect cash flow conversion rates to return closer to historical averages in the third quarter. We ended the second quarter with gross debt of $465 million with a gross leverage ratio of 2.2 times, and our net debt was $355 million, giving us a net leverage ratio of approximately 1.7 times. In the quarter, we acquired Keyon Technologies for approximately $75 million. As a reminder, Keyon combines proprietary RFID hardware with AI-enhanced cloud-based software to offer real-time inventory and asset management, filling a crucial software integration gap for better penetration into the medical markets, including hospitals. We also amended our credit facility in the final week of June, increasing its size to approximately $1 billion and adding a $350 million accordion feature, giving us nearly $1.4 million of borrowing capacity over the next five years. This new pro-rata bank facility gives us borrowing capacity to pursue our acquisition strategy while maintaining the debt leverage discipline we have practiced over the last decade. Now, I'll share some additional performance metrics and some details on our operating segments. For the second quarter, Novanta had a 10% growth -over-year in bookings and 20% growth sequentially, and a -to-bill ratio of 1.02, reflecting strengthening backlog and a strengthening outlook. We saw a continued strong pace of bookings in both our segments, demonstrating not only stabilization of demand, but also increased demand outlook for 2026 and the continued strong momentum of new product launches. In the second quarter, medical market sales represented 54% of total Novanta sales, and advanced industrial markets represented 46% of total sales. New product sales grew by more than 50% -over-year, and our vitality index climbed to 21% of total sales. We are seeing growth in new product sales across all businesses, but especially the medical solution segment. Through the first half of the year, we launched over a dozen new products, mainly focused on high growth and markets in advanced surgery and robotics and automation. Also in the quarter, as we mentioned, we saw excellent design win activity, with the company-wide design wins growing over 150% -over-year. The second quarter, automation enabling technology segment revenue grew by 4% -over-year, beating expectations and driven by continued strength of the robotics and automation business unit, which was up nearly 16% -over-year. The -to-bill in this segment was 1.05, and bookings were up 8% -over-year and 17% sequentially, giving us improving customer visibility. Adjusted growth margins in this segment were approximately 49% of 40 basis points -over-year, driven by favorable mix, but partially offset by the increase in tariff costs. Both new product revenue and customer design wins doubled -over-year on the back of both our innovation and stronger commercial execution by our teams. In addition, vitality index was in the high teams percent of sales, up significantly versus the prior year. Moving on to medical solutions, revenue in this segment was roughly flat -over-year. This segment saw a -to-bill of 1 in the second quarter, and bookings were up 13% -over-year, but up 26% sequentially on the back of record new product launches. New product sales in this segment grew by over 30% -over-year, and the vitality index in this segment was over 25% of sales in the second quarter. Our advanced surgery business experienced 17% growth -over-year. Driven by both strong patient procedural growth rates in healthcare on a global basis, and from the launch of our second generation smoke evacuating insulators, which has received overwhelming market acceptance and adoption. These growth dynamics are expected to continue for the remainder of the year and well into 2026. Conversely, our precision medicine business, which serves the life science and multi-omics markets, experienced a 13% decline in sales -over-year. However, sequentially the business grew 10% and is expected to continue to improve sequentially in subsequent quarters. Adjusted growth margins in this segment were approximately 44% in the quarter, flat sequentially and in line with the expectations, but slightly higher tariff costs, which we expect to mitigate further in the third quarter. Finally, moving to guidance, let me give you an update on our tariff response plan. Speaking first, the impact of tariffs on our supply chain, our cost mitigations are largely on track and we continue to work on efforts to accelerate our plans. With some of the recently announced trade deals at higher than expected permanent tariff rates, we are seeing approximately a $4 million net impact from tariffs -to-date on our cost of sales. However, we continue to make strong progress with both tariff mitigation strategies and cost mitigation strategies to further reduce the impact in the second half. Next, to address the matter of impacts on tariffs between the United States and China, while tariffs have remained paused between the two countries, there is optimism at trade agreement being reached quickly. Our customers in China continue to be cautious with placing committed purchase orders on goods from our U.S. factories. As such, we are working with them on accelerating our plans to ship production to non-tariff regions and are exploring further short-term mitigation strategies to minimize the risk of ordering products from us. While Chinese customers ordering products from our U.S. factory has been muted, design win activities with our Chinese customers have accelerated, which we believe signals to us that our Chinese customers have confidence that we have the right tariff mitigation strategies to reduce their costs and risks and that they are excited about our new product innovation and what it can do for them in their markets. In addition, demand for our products manufactured in China, which is our in China, for China strategy, accelerated in the quarter, which drove our total China sales up 15% year over year in the quarter. And finally, due to the fluid and ever-changing nature of the global trade environment and the resulting implications on end market demand at the end of June, we launched our cost reduction plans that we had previously announced, including changes that support the regional manufacturing strategy. Over the long run, we expect these actions to structurally improve our costs by simplifying our operating model, allowing further expansion of our gross margins, while permanently minimizing the disruptions from tariffs on our products and for our customers. The total restructuring charges related to this program are expected to be in the $20 to $25 billion range, with the bulk of the savings run rating in the fourth quarter of 2025 and into 2026. Novanta is committed to deliver sequential revenue and profit growth driven by our innovation pipeline, robust customer demand in secular growth markets and operational discipline, including our cost reduction efforts and the regional manufacturing strategy. Despite the rapid changes in tariffs and trade agreements, we believe we have navigated well and have quickly adopted to the environment. After several years of investment heavily in R&D to deliver breakthrough innovations to our customers, the results of those efforts are materializing in our financials, in our design wins, and in our new product revenue. And with a stabilizing demand environment, as evident by our bookings growth, we believe we are well positioned to accelerate our organic growth initiatives further when the macroeconomic tailwinds improve. While trade dynamics could further disrupt our outlook, increased visibility from our customers is giving us confidence to reissue full year guidance, albeit with some caution. As such, we now expect full year 2025 gap revenue to be approximately $970 million to $985 million, which represents overall revenue growth of 2 to 4%. For adjusted gross margins, we expect to achieve approximately 46%. This outlook concludes the cumulative impact of expected tariff costs and the associated temporary redundancy in costs from our regional manufacturing strategy. Excluding those extra costs, we would be on track to achieving our goal of 100 basis points of gross margin expansion this year. This resilient margin performance is thanks to the Novanta Growth System, the business system that is allowing us to maintain our financial commitments despite the cost headwinds. We expect R&D and SG&A expenses for the full year to be approximately 28% of sales or between $274 million and $278 million. This guidance excludes expected costs associated with the design and planning phase of a standard ERP system, which is scheduled for a phased deployment starting in 2026 and taking place over multiple years. Further supporting our footprint consolidation and our regional manufacturing strategy. Besides improved scalability and resiliency benefits, this also supports our gross margin expansion plans and operating expense reduction plans. Depreciation expense should be approximately $16 million for the full year. Stock compensation expense should be approximately $37 million for the full year, which includes the change in incentive compensation plans, which we made for all our incentive-based employees. Aligning them tightly with our strategy, driving strong employment engagement, and aggressively driving shareholder value, while also reducing near-term cash needs. For adjusted EBITDA, and for the full year of 2025, we expect to be $225 million to $230 million, or approximately a 23% EBITDA margin. This represents -over-year growth of 7% to 10%. Interest expense is expected to be roughly $23 million for the full year of 2025, excluding any material changes and debt balances. We expect our non-GAAP tax rate to be around 22% for the full year. We

are

still analyzing the effects of the new corporate tax law changes, and as such have not incorporated these changes fully into our full year rate. Deluded weighted average shares outstanding will be between $36 million and $37 million shares. For the full year 2025, our adjusted diluted earnings per share we now expect to be approximately $3.22 and $3.36, representing growth of 5% to 9%. Finally, we expect strong cash flow for the full year, from both lower cash taxes in the second half, as well as better inventory management and stronger profit. Moving to the third quarter of 2025, we expect GAAP revenue in the range of $244 million to $247 million, which represents a -over-year change of reported revenue growth of flat to up 1% and sequential growth of 1% to 2%. At the segment level in the third quarter, we expect automation enabling technology segments to reach flat to low single digit decline -over-year, caused largely by lower exports from U.S. factories to Chinese customers, something we expect to better mitigate in the fourth quarter. We expect this segment to grow sequentially 1% to 2%. Our medical solutions segment is expected to demonstrate mid-single digit growth -over-year and up sequentially approximately 3%, from continuous strength and advanced surgery at rates comparable to those demonstrated in the second quarter, and from a sequentially improving precision medicine business. Moving on to adjusted gross margin for the third quarter, we expect to be at nearly 46%. This outlook includes the cumulative impact of expected announced tariffs, as well as some near-term redundancy in costs from our regional manufacturing strategy, which we expect to overcome in the fourth quarter. We expect R&D and SG&A expenses in the third quarter to be approximately $68 million to $69 million. Similar to our full-year guidance, we have excluded expected costs associated with design and planning phase of our standard ERP system. Appreciation expense, which is approximately $4 million in the second quarter, will be similar to the third quarter. Stock compensation expense was $7.5 million in the second quarter, which will be nearly $11 million in the third quarter. This increase in quarterly stock compensation expense is driven by both the retention and incentive equity awards associated with the Keyon transaction, as well as the in-quarter impact of the change of incentive compensation plans, which we discussed earlier. For adjusted EBITDA for the third quarter, we expect a range of $57 million to $60 million. Interest expense, which was $6 million in the second quarter, will be similar in the third quarter, and we expect our non-GAAP tax rate to be around 22%. For adjusted earnings per share, we expect a range of $0.78 to $0.85 for the third quarter. Finally, we expect third quarter cash flows to rebound versus the second quarter and return to a cash conversion rate closer to the historical averages we have demonstrated. This updated outlook considers our latest view of the end markets, the continued successes of new product launches, foreign exchange rates based on the second quarter, and the signed tariff trade agreements between the U.S. and its trading partners as of July month end. However, in this environment, the dynamics of both trade and foreign exchange, as well as government-sponsored funding and regulatory disruptions, is ever-evolving and therefore subject to change. But we continue to have confidence in our ability to navigate these dynamics and adapt quickly. And finally, with improvements to both our core business and long-term visibility to customer demand, along with a strong balance sheet and strong credit facility, we are well positioned to accelerate our acquisition pipeline with more meaningful and impactful acquisitions. Given our current acquisition pipeline, we feel confident in executing a transaction by year end. In summary, we are confident in the fundamentals of our business, the long-term strategy, and our business model remains intact.

We are

excited about our new customer wins and the success of new product launches. We continue to make strong progress in high-growth markets, particularly medical markets and physical AI robotic markets. As a company, we remain 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 up for questions.

We will now begin the question and answer session.

To ask a question, you may press star, then one, on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then two. And our first question will come from Lee Jagoda of CJS Security. Please go ahead.

Hey, good morning, guys. Morning, Lee. I guess, Robert, just to start, can you break down your revenue guidance, and you can use the midpoint, I guess, in terms of growth from Keon, the impact of FX, and then the true organic growth underlying?

For the second half or for the full

year?

Full year or second half, either one or both?

Okay. Well, for the full year, you know, the reported on an organic basis, it would likely be down 1%

to up 1%, somewhere in that range. And then the, and

what's the FX implied impact? For benefit?

The same FX impact that we have in the second quarter, so we just carried that forward for the full year.

Got

it.

So the delta is really the key on that position.

Gotcha,

perfect. To be fair, it's done significantly better than expected.

Got it. And then, I, it was, hearing all the color around the new products over the next several years was really good and interesting earlier. Given you kind of have pretty good visibility about your product roadmap, what do you think are the biggest drivers of organic growth in 2026 in terms of the new products, independent of whatever the market's going to do?

Yeah, hi, this is, this is Matthias. So basically a continuation of the advanced surgery product ramps, right? Because we are basically having the first year of ramps this year, and that will continue to expand. So that's one. Secondly, the physical AI, so basically the AI enabled robotics market, so warehouse automation. You heard us comment about a $50 million contract, what we've won there, where we see, yeah, rapid deployment of robotics in advanced warehouse automation applications. And these robots need a sense of touch and a sense of fast and safe movement. And we have a unique capabilities to help in that application. And third, we see, let's say related applications, humanoid still will be small, but what we commented on is that the overarching industrial physical AI applications will double in 26 versus 25, and then again, double again, be it from a small base, but that kind of tells you that we're growing. And then finally, we are seeing, let's say, very, very strong design wins that will start to ramp. So at the company level, 150% year over year. They won't all ramp in 26 fully, but they will start to ramp, and that's a visibility we have. Again, a wide variety of applications. I commented on, let's say, additive manufacturing driven by aerospace and medical. What you see is that, of course, with the whole tariffs and trade environment, people want to produce locally. And actually, additive manufacturing is a very good way to do that. And so we're seeing some significant traction there, and we've won some business, some significant business there. But also, what I would call advanced material processing applications that are actually supporting some of the on-device AI investments in advanced packaging related to advanced AI or related markets. So those are a few areas that we see we're excited about, that we commented on, and that we see growing, despite whatever the environment will bring. And it shows you that we're laser focused on the secular growth markets, no matter the environment. And then with the innovation and customer intimacy, we're very encouraged by everything that is happening there.

And then within life sciences… What thing I'd

add there? Sorry.

Yeah, go ahead.

Sorry, Lee. Go ahead. No, no, go ahead. The only thing I was going to add is that the advanced surgery business should continue to demonstrate the same level of growth, which is kind of the mid-teens type growth as we get into next year. Our robotics and automation business should continue to participate as a consequence of new design wins and new product introductions, somewhere in that 10% type of range. And then if you just factor in that you're not going to see the same level of declines in our industrial or precision manufacturing business, nor the precision medicine business. That gives you a pretty good indicator of what 2026 is going to look like.

Well, and that's sort of where I was going to go next. So industrial and precision medicine, it sounds like you're seeing certainly some signs of improvement in the industrial and maybe at a minimum bouncing along the bottom in life sciences. So I guess have we seen the low point for the year in your mind in those two areas and sitting here today, are we looking at sort of a flattish 2026 for those end markets or could they still decline further?

Well, based on what we see today, and again, you never know with, of course, the trade changes. But based on what we see today, based on the bookings and the customer outlook, which is actually improving, customer inventories on the industrial side have been depleted. And so we see 2026 backlog actually building on the industrial side. And we see the business sequentially improving in the second half of the year. So based on that, yeah, we see that business as reaches bottom and then sequentially improving from here. And the precision medicine also we commented that that's more of a technology shift in addition to market dynamics. The market dynamics we don't necessarily see improving in the near term, but we do see the technology shift based on the machine vision as well as the RFID transitions that we're making. We see that having a sequential improving effect on the business. Therefore, we see that business sequentially improving as well. So, yes, and then the outlook for life science is a little bit unclear. But what we do is we just focus on what we can control, which is those new technologies as well as we're aggressively managing profit flow through as well as capital allocation, of course, to these areas that have really strong tailwinds like physical AI advanced surgery.

Perfect. I'll hop back into you. Thanks. Thanks, Lee.

The next question comes from Brian Drab of William Blair.

Please go ahead.

Hi, thanks. First, Robert, you touched on China and tariffs. Did you say specifically status of do you talk about in the same context about the $35 million that was held up and is it still $35 million at risk for the year?

Yeah, the $35 million is factored into our guidance right now, so we haven't assumed that we're going to recover that yet. So I would take that's where we issue the guidance that I made a comment around with some caution. So we're not seeing the order behavior yet from our customers. In the second quarter, and as we enter the month of August, the same holds true. And that's largely just because of the uncertainty with how those tariffs will unfold. So when you're ordering product from a US factory with a 90-day lead time, they can get themselves stuck in a position on a non-councilable purchase order where they'll be importing at an unknown expense to them because they don't know what the offset is. The local first and foremost, we're growing in China for China. So that strategy, which represents 50% of our sales into overall exposure of China sales, is growing. And as a consequence, we saw total China sales up 15% year over year. So despite missing that, we still got some impressive growth happening. And then second, the design win activities with our Chinese customers did accelerate. So we are seeing signals from them to design our technology into new products, which effectively you would not do if you thought the situation was going to be permanent. So effectively, our strategy of how we're going to mitigate tariffs is being well received by our customers, and they're being as patient as they can until we get those fully implemented. So now, could we get that turned around by the fourth quarter? Yes, it's possible. Not third quarter, but definitely by the fourth quarter. It's possible to get that rectified and start clawing back some of that revenue, but we haven't factored that in at this time until we have better visibility around the execution of that plan.

Yeah, and of course, it's driven, Brian, by the transfer of manufacturing, right? So our customers, we shared those plans. They're confident in our plans. That's why the design wins are continuing. And of course, the actual transfers are starting to happen in the fourth quarter, which is really the mitigation, right? So then it really depends how quickly can you rectify and ramp from there. Yeah, but structurally, we're addressing it. It's really a timing issue that we're working through.

Understood. Are those design wins in China, medical, industrial, robotic surgery? Did you say?

Mostly industrial.

Mostly industrial and robotics. So our robotics and automation business, of course, Mattias went into some details around that. There's a lot of new products launched around that, but we're also seeing nice design win activities in our precision manufacturing business.

Okay. Can you say if any of those are humanoid?

All our, we've mentioned 10 humanoid vendors or customers that we have. Those are, we're very specific in the language saying that there are US and European exposure. So I would say the bulk of our humanoid exposure today is in the US and European markets. We'd be reluctant to say that there's anything in China at this point in terms of.

Yeah. And some, but not a lot, I would just say. And then, and we're not banking on that, but there are other precision robotics markets, both surgical as well as kind of adjacent to warehouse automation that are getting traction and where we feel we got a very good offering. So.

Okay. Thanks. And then just one more for now, I guess. Can you talk a little bit more about the maybe the specific use case within the warehouse for the warehouse robotics win and what type of technology are you winning with? Like is it forced torque or servo drives, the haptic? And then I've got one more piece of this question. Could this be much bigger than 50 million down the road?

Yes. Yeah. So let me, thanks, Brian. Let me kind of try to parse it out. So first and foremost, what you see is that vision alone is not, will not do the trick in these really advanced routes over automation markets where you've got to almost process goods faster than humans. And so you got to mimic humans in terms of touch. And so it's proven by one of the leader players that the touch is actually essential. And then the fast and safe reaction to what you're sensing, and then that turning that into motion and doing that safely is actually very complicated. If you do that in a small form factor at the edge, meaning at the end effector at where the action happens. And so Novanta has unique capabilities to do this in a small form factor very precisely and reliably to the extent that the tremendous demands on these applications where you basically cannot drop a package for, maybe you can drop a package like once in 24 hours, which means extreme accuracy. That's what we bring to the table. And that then provides that high conviction of these routes automation players to start deploying this because now it's actually possible to replace humans. So that is what that is. Of course, there is a massive amount of capital that is being deployed. That's all public. So what we like about it is, of course, the use case is there. It's proven in the warehouses. The capital is there. And so it will be a multi-year deployment cycle. We've commented on, and you know us, we're kind of conservative. We only will things that we have won and that we've contract signed. So that's the 50 million. I do believe, and we do believe that down the line, if you combine all these physical AI applications and you look at the served available market for us based on conservative estimates, that's about a billion dollar market in 2030. And we're aiming, of course, to get a decent chunk of that. So we think it's a sizable opportunity down the line. We're allocating and deploying resources aggressively to both ramp and continue our new product innovations, which we feel are leading in the industry. So that is forced work sensing, that is server-authorized, but it's also including encoders, let's say, all in a subsystem package that works in the different use cases for these OEM players. And whether it's rouser automation or humanoid or related applications. These robots don't necessarily have to stand on two feet. That's maybe the last thing I will say. You see a lot of application-specific, related applications that you see robots on wheels or you see them fixed in a location, they're doing very similar smart tasks. And so hopefully that answers the question.

Yeah, that was really interesting and congrats on the warehouse win and all the other wins you announced this quarter. Thanks.

Thanks, Deborah.

The next question comes from Rob Mason of Baird. Please

go ahead.

Oh, good morning. Maybe just to follow on your last response, Matthias, when you were talking about the entire package of your offering into this market, forced torque and servo drives and encoders, was that the case for this particular warehouse automation contract or was that just forced torque because you mainly were referencing sensing?

Well, it's the sensing and their reaction. So it's actually, it has both the servo drives as well as the sensing capabilities. And again, we're commenting on this one player, but we've won multiple warehouse automation design wins that are a bit smaller than this, where we use basically the whole gamut of the different capabilities. And it depends a little bit on the player, how much one versus the other is being used. But I would say holistically, it's true that both in browse automation and humanoids, as well as surgical robotics, actually these capabilities are getting more important going forward. Now, so the sense of haptic feedback in surgical robotics is a key capability. It's basically the same capability that gives the robot in the warehouse a sense of touch, as well as the humanoid, right? But in all these applications as well, the low latency meaning fast response safely, so humans can work side by side with these robots safely, embedded safely is not trivial. And we do that embedded into our servo drives, which is unique at a very small form factor, super precise, very high power density, which means that small form factor, yes, very powerful. So it's all these things combined makes us uniquely qualified for these applications. So the short answer is, is both capabilities are included in these applications.

I see. I see. And just as you've talked about kind of the ramp in these products in 26 and 27, are you needing to add additional capacity? Do you have current capacity to serve this?

Yeah, no, we do. On the other hand, this is, and I'm glad you asked this question, it's a unique example of how the Noventa growth system can really help to increase capacity very efficiently. So just we just completed a Kaizen with over 20 people and just cutting lead times down by a factor of three, increasing capacity by a factor of four to five without adding major capacity. And now down the line, we see this ramp growing beyond that. And there, yes, we will have to automate and, you know, eat our own dog food, so to speak, right? Put automation in our lines to kind of get to these really high volumes. So the answer is yes. And we're using the Noventa growth system to do this efficiently and reliably.

I see. Maybe just last question. You know, one of the end marks you touched on, you said was mixed was around the semiconductor electronics area. I'm just curious. I mean, we have seen, you know, really over the past year, I guess, you know, some pushes to the right in that industry. How does that factor into your second half guide, you know, around new products, whether that, you know, gets into the lithography space you're talking about? I'm just curious if you've had to shuffle some of the plans again around that.

Yeah, I would say that, you know, any sort of risk associated with that, those applications has been factored into our second half guidance, as well as the before mentioned China situation where we are not anticipating that revenue in our guidance to come back. Although, you know, that's looking more and more possible as, you know, as we get as particular as we start to look at Q4. We are shipping units into those applications in the fourth quarter. So there are some units going out. They're not at the volumes that we were hoping for before, but we are, we feel very good because we're still designed in on a sole source basis into those applications. We've doubled the content that we've had in from a per unit basis than we've had in prior periods. And then we have some backward compatibility with some of our technology. So we feel very good that we have the right technology, the right application position, those whole source basis that's positioned for growth. We're just waiting and anticipating as that market works through some dynamics that will allow those shipments to really ramp up to the volumes that we're hoping for and that have been communicated. Actually,

very good. Thank

you.

Thanks, Rob.

This concludes our question and answer session.

I would like to turn the conference back over to Mr. Matthias Glastrow for any closing remarks.

Thank you, operator. And thank you, everyone, for your questions. In closing, as always, I would like to thank our customers or shareholders, and especially our dedicated employees for their ongoing support. We appreciate your interest in the company, your participation in today's call. I look forward to joining all of you soon at our third quarter 2025 earnings call. Thank you very much. This call is now with your