Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc. [Operator Instructions]. Second Quarter 2025 Earnings Call. 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.

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

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta 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%, surpassing 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 growing 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, advanced minimally 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' bill 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 health care 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,…

Thank you, Matthijs. Our second quarter 2025 non-GAAP adjusted gross profit was $111 million or 46.1% adjusted gross margin compared to $110 million or 46.6% 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 for the quarter were approximately $1 million. Adjusted EBITDA was $52 million in the second quarter or 22% adjusted EBITDA margin, demonstrating growth of 2% year-over-year. On the tax front, our non-GAAP tax rate for the second quarter of 2025 was 21% versus 20% in the prior year. Our tax rate increased year-over-year, mainly due to changes in jurisdictional mix of pretax income. Our non-GAAP adjusted earnings per share was $0.76 in the second quarter, up 4% versus the prior year. Operating cash flow for the second quarter of 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 Kion. 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 2.2x, and our net debt was $355 million, giving us a net leverage ratio of approximately 1.7x. In the quarter, we acquired Kion Technologies for approximately $75 million. As a reminder, Kion…

[Operator Instructions]. Our first question will come from Lee Jagoda of CJS Securities.

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 Kion, 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, the reported -- on an organic basis, it will likely be down 1% to up 1%, somewhere in that range.

And then the -- and what's the FX implied impact or benefit?

The same FX impact that we had in the second quarter. So we just carried that forward for the full year.

Got it.

So the delta is really the Kion acquisition. To be fair, it has done significantly better than expected.

Got it. And then I 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 road map, what do you think are the biggest drivers of organic growth in 2026 in terms of the new products independent of whatever the market is going to do?

Yes. Lee, this is Matthijs. 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, yes, 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 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. Now they won't all ramp in '26 fully, but they will start to ramp, and that's the 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 staying 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...

One thing I'd add there -- sorry...

Yes, 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 would give 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 in 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 2 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, right? 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, yes, we see that business has reached bottom and then sequentially improving from here. 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. And 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.

The next question comes from Brian Drab of William Blair.

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

Yes. 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 issued 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 would unfold. So when you're ordering product from a U.S. factory with a 90-day lead time, they can get themselves stuck in a position on a noncancelable purchase order where they'll be importing at an unknown expense to them because they don't know what the tariff cost is going to be. Now that being said, what I see as an 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 got some -- we still got some aggressive 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.

And of course, it's driven, Brian, by the transfer of manufacturing, right? So our customers, we've 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. 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. Our Robotics and Automation business, of course, Matthijs 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 humanoids?

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

Yes. 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. And then just one more for now, I guess. Can you talk a little bit more about 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 force torque or servo drives, haptic? And then I've got one more piece to this question. Could this be much bigger than $50 million down the road?

Yes. So let me -- thanks, Brian. Let me kind of try to [ parse ] that out. So first and foremost, what you see is that vision alone is not -- will not do the trick in these really advanced warehouse automation markets where you're going 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 turning that into motion, doing that safely is actually very complicated if you do that in a small form factor at the edge, meaning at the end of factor 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 warehouse 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 multiyear deployment cycle. We've commented on -- and you know us, we're kind of conservative. We only will quote things that we have won and that we've contracts 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 $1 billion market in 2030. And we will -- we're aiming, of course, to get a decent chunk of that. So that's -- 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 -- and yes, so that is force torque sensing, that is servo drives, 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 warehouse automation or humanoids or related applications, right? These robots don't necessarily have to stand on 2 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 fix in the location. We're doing very similar smart tasks. So hopefully, that answers the question.

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

The next question comes from Rob Mason of Baird.

Maybe just a follow on your last response, Matthijs. The -- when you were talking about the entire package of your offering into this market, force torque and servo drives and encoders, was that the case for this particular warehouse automation contract? Or was that just force torque because you mainly were referencing sensing?

Well, it's the sensing in their reaction. So it's actually -- it has the -- 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 of one versus the other is being used. But I would say holistically, it's true that both in warehouse automation and humanoids as well as surgical robotics, actually, these capabilities are getting more important going forward. 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? And 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 server 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 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?

Yes. 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 Novanta 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 3, increasing capacity by a factor of 4 to 5 without adding major capacity. Now down the line, we see this ramp growing beyond that. And there, yes, we will have to automate and either 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 Novanta Growth System to do this efficiently and reliably.

I see. And maybe just last question. One of the end markets you touched on, you said was mixed was around the semiconductor electronics area. I'm just curious, I mean, we have seen really over the past year, I guess, some pushes to the right in that industry. How does that factor into your second half guide around new products, whether that 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?

Yes. I would say that any sort of risk associated with 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 that's looking more and more possible as we get -- particularly 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 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 and the right application positioned on a sole-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.

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

Thank you, operator, and thank you, everyone, for your questions. In closing, as always, I would like to thank our customers, our 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 adjourned.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.