Novanta Inc. (NOVT) Q1 2026 Earnings Report, Transcript and Summary

Good morning. My name is Betsy, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Inc.'s First Quarter 2026 Earnings Call. [Operator Instructions] 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 First Quarter 2026 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 have not received a copy of our earnings press release issued last night, 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 last night 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 beat expectations for revenue growth in the first quarter, delivering 10% reported growth and 3% organic growth, a step-up versus the prior quarter. Bookings grew 37% year-over-year with a book-to-bill of 1.10 on continued new product momentum and strong commercial execution. Every business delivered double-digit bookings growth and year-over-year revenue growth. Profit performance was equally strong. Adjusted EBITDA grew 14% and our adjusted EBITDA margin expanded 70 basis points year-over-year and adjusted diluted EPS grew 9%. Cash flow performance was particularly encouraging. Operating cash flow increased by 63% year-over-year. And in the quarter, our cash flow conversion to net income was over 200%. I'm very proud of our team for delivering these solid results in an evolving trade and economic climate. Our momentum is building. We expect organic growth to reach high single digits in the second quarter. The broad-based demand signals across our businesses give us confidence in continued acceleration through the back half of the year, absent a deeper shift in the macro and geopolitical environment. Our end markets and our performance are trending as we predicted in our last earnings call. And if anything, momentum is better and more broad-based. Robotics & Automation remains robust. minimally invasive and robotic surgery markets are consistently strong. Our Precision Manufacturing business is back to mid- to high single-digit revenue growth. Semiconductor markets are in an upswing, and we're seeing accelerating double-digit growth in AI data center-related applications. In addition, we're taking share in our targeted high-growth markets. New product revenue is up 50% year-over-year. design win momentum is strong and medical consumables continue to grow double digit. Novanta's long-term strategy is focused on winning in high-growth end markets with durable secular tailwinds, AI-driven Robotics & Automation, minimally invasive and robotic surgery, digital and AI-driven manufacturing and Precision Medicine. We invest in growth platforms within these secular markets that represent a $4 billion incremental market opportunity by 2030. This continues to be the right strategy. In these markets, we've built deep and long-term collaborative partnerships with leading OEMs globally by solving their most complex needs with proprietary technologies and solutions. This creates sticky, exclusively designed-in product relationships that typically last up to a decade on our customers' platforms. As an innovation-driven company, we maintain our edge through continued investments in the platforms we believe will drive the majority of our long-term growth, next-generation insufflators and pumps, robotic surgery technologies, intelligent physical AI solutions for connected care and precision robotics and intelligent subsystems for laser beam steering and digital AI-driven manufacturing and Precision Medicine. For 2026, we remain focused on our top three priorities. First, deliver mid-single-digit organic growth or higher for the full year, executing our strategy on the back of record bookings, new product launches and commercial momentum. Second, acquisitions, deploying our increased capacity into larger opportunities in our target markets to accelerate our strategic direction. And third, completing our manufacturing foundation, finishing the regional transfers, scaling competence centers and embedding the Novanta growth system across the organization. Let me share the progress we're making towards each of these priorities. Starting with organic growth. The first quarter marked a meaningful step forward and the momentum across our businesses gives us confidence that this is a trajectory, not a data point. Let me walk you through what we see in each business. Our Advanced Surgery business delivered double-digit growth in the quarter with consistent strong demand in minimally invasive and robotic surgery applications. Our next-generation insufflators have set the industry standard for patient safety, smoke evacuation and surgical workflow optimization. The business remains on track for strong full-year growth, driven by continued momentum in insufflation, expansion into robotic surgery and arthroscopy, new product ramps by our customers and a rapidly scaling medical consumables business. At 15% of Novanta revenue and with a sustained double-digit growth trajectory, our medical consumables franchise has become an important growth engine and capability for the company. Next, our Robotics & Automation business achieved high single-digit revenue growth in the first quarter with bookings up 50% year-over-year. The growth outlook here is sustainable, supported by multiple GenAI-driven tailwinds, new product advancements for precision robotics and warehouse automation and a recovering wafer semiconductor wafer fab equipment market where the up cycle is taking shape. In March, we joined the NVIDIA Halos AI Systems Inspection Lab, a recognition of our server drive technology leadership in safety validated AI-driven robotics. We expect the momentum to continue in the precision robotics and physical AI space. Next, our Precision Manufacturing business returned to mid-single-digit growth in the first quarter, the fifth consecutive quarter of double-digit bookings growth. The long-term driver here is the rising automation and digitization of new manufacturing lines with ever-increasing demands for throughput, productivity, smaller form factors and tighter tolerances. Our newly launched intelligent laser beam steering subsystems offer unique proprietary capabilities to meet those needs across probe card production for AI GPU chips, laser additive manufacturing for aerospace and drone production, advanced packaging and substrate production for data center-driven applications and light engines for deep UV and EUV lithography. Together, these create a durable multiyear tailwind for Novanta. Our Precision Medicine business delivered double-digit revenue growth in the first quarter, driven by the Keonn acquisition, along with modest growth in the core business. Customer demand in sectors outside of life sciences supported the quarter. Our life science exposure is expected to be less than 10% of the company's overall revenue in 2026. Finally, let me call out our growing exposure to the GenAI data center boom. This exposure spans a broad set of leading customers across multiple application areas. DUV and EUV lithography, advanced packaging, probe card production, precision robotics and GPU drilling, metrology for advanced semiconductor wafer nodes, wafer fab nodes and other AI data center applications. Our Robotics & Automation and Precision Manufacturing businesses carry the largest share of this exposure, which we estimate at approximately 15% of total company revenue in the first quarter. Collectively, these applications grew about 20% year-over-year, and we expect this growth rate to increase as we progress further into the year. The next 2026 priority I wanted to briefly address is acquisitions. Our strategic direction is to expand our business mix and technology leadership in medical technologies, medical consumables and embedded software. further strengthening a portfolio that delivers predictable, sustainable and consistent revenue, profit and cash flow growth. Our pipeline remains deep and active with a strong set of mid- to larger opportunities across these areas and adjacencies such as bioprocessing. We have the balance sheet capacity to move decisively and a proven track record of creating value from the deals we close. We are working multiple opportunities in parallel and expect to deploy meaningful capital this year. Rounding out our 2026 priorities, transforming our manufacturing footprint for scale and resilience. We're making steady progress on our regional manufacturing initiative with two facility closures on track to be completed in the second quarter. This supports a gross margin step-up in the second half. With more than 20 facilities across the company today, the opportunity is significant. By consolidating into fewer centers of manufacturing excellence, we gain better scale, stronger systems, deeper talent and full in-region for-region capability. This deepens our preferred supplier relationships with leading OEMs while sustainably expanding both our gross margins and profitability. Stepping back, let me speak directly to the macro. The environment is generally complex. Trade dynamics, geopolitical tensions and input cost volatility are real, and they affect every company, including ours, and we're watching them closely. The complexity and opportunity often travel together. And what we see in front of us across AI infrastructure, semiconductors, advanced industrial and medical is a strong demand environment with our new product innovations driving record bookings and design wins. We have the strongest team Novanta has ever had, the right portfolio of innovations and the momentum to capitalize. So to wrap up, the first quarter was a strong start. Organic growth inflected upward, profit and cash flow grew meaningfully year-over-year and execution remained disciplined. The second quarter guidance reflects another meaningful step-up in demand and continued momentum. And the pace of new bookings and design wins tell us our customers see the same trajectory. We are confidently reaffirming our full year outlook and even more confident that we can navigate the path ahead. Novanta's trajectory from here is up. With that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert?

Thank you, Matthijs. In the first quarter, Novanta bookings increased 37% year-over-year with a book-to-bill ratio of 1.1, supporting a positive outlook and a growing backlog. All of Novanta's businesses had double-digit bookings growth versus the prior year and all had revenue growth versus the prior year. We continue to see sustained and accelerating customer demand supporting our organic growth outlook for 2026. In addition, new product sales grew over 50% year-over-year, raising the Vitality Index to 27% of sales. Our design wins were also strong with company-wide design wins up nearly 30% versus the prior year. Our sales in the medical end markets represented 53% of total company sales with sales in the advanced industrial markets at 47%. Also in the quarter, our medical consumable sales remained at nearly 15% of total company sales with continued strength in this category due to the high growth rate of our new product launches in our Advanced Surgery business. Moving on to the financial results. Our first quarter 2026 non-GAAP adjusted gross profit was $118 million or 45.6% adjusted gross margin compared to $108 million or 46% adjusted gross margin in the first quarter of 2025. Adjusted gross margins were down 60 basis points year-over-year and roughly flat sequentially. Gross margins reflected a price/cost timing impact, resulting in a weaker-than-expected outcome because of higher freight, tariff costs and material costs as a result of geopolitical dynamics that rapidly shifted in the first quarter at a rate that outpaced our ability to surcharge customers and reprice orders. This lag is not an unexpected challenge. However, with some near-term stability and better visibility now, we are quickly shifting resources to offset the higher cost in a manner consistent with prior practices. We are confident that these additional actions, combined with our site closures will put our gross margins back on track to achieving prior full year guidance. Moving on to R&D expenses were $23 million or approximately 9% of sales. which is down 1 point as a percent of sales versus the prior year. First quarter SG&A expenses, excluding certain adjustments, were $51 million or approximately 20% of sales, which is flat as a percent of sales versus the prior year. Adjusted EBITDA was $57 million, demonstrating strong growth of 14% year-over-year and achieving a 22% adjusted EBITDA margin, which was up 70 basis points versus the prior year. On the tax front, our non-GAAP tax rate in the first quarter was 19% versus 20% in the first quarter of 2025, and our tax rate decreased year-over-year mainly due to jurisdictional mix of pretax income. Our non-GAAP adjusted earnings per share was $0.81 for the first quarter, up 9% versus the prior year, which includes the higher share count from our recent equity fundraise. The strong result was achieved while absorbing a $0.03 headwind from the temporary inflation and tariff impact, which I just spoke to. Operating cash flow in the first quarter was $52 million compared to $32 million in the prior year, representing 63% growth year-over-year and a sixfold increase sequentially from the weak fourth quarter. This represents over 200% cash flow conversion of net income. The rebound was from strong profitability and sales linearity resulting in strong customer collections. We achieved this while making deliberate investments in safety stocks to insulate ourselves from supply tightness, including electronic components, rare earth materials and inventory tied to our regional manufacturing routes. These investments position us to execute on strong revenue visibility we have for the remainder of the year and avoid part shortages. For the second quarter and full year, we expect to achieve our cash flow conversion target of 100% or better as a percent of net income. We ended the first quarter with gross debt of $249 million and with a gross leverage ratio of 1.1x. Our first quarter cash balance was $389 million, and so our net debt was negative $139 million, giving us a net leverage ratio of negative 0.6x, maintaining a positive net cash position. In the first quarter, we purchased approximately $18 million worth of company stock. While acquisitions remain our top capital allocation priority, we will continue to repurchase shares opportunistically when temporary dislocations create a compelling return on that capital. But at the same time, the strength of our current acquisition pipeline naturally tempers the pace of that buyback activity. Now I'll share some details on the operating segments. In the first quarter, Automation Enabling Technologies segment grew by 7% year-over-year, better than expected. The book-to-bill in this segment was 1.15 and bookings were up 35% year-over-year. Our Precision Manufacturing business, which mainly serves industrial equipment markets saw year-over-year revenue growth of 6% and double-digit growth in bookings, continuing the momentum we discussed in the prior quarter. In our Robotics & Automation business, revenue was up 7% year-over-year and bookings were up 50%. We continue to see a healthy outlook in the business with solid demand for advanced robotic applications and increasing strength in semiconductor applications benefiting from the investment in artificial intelligence. The overall Automation Enabling Technologies segment adjusted gross margins were approximately 49%, which was roughly flat sequentially and down 60 basis points year-over-year, driven by the tariff and cost inflation dynamics I previously discussed. New product revenue from this segment grew over 70% year-over-year in the quarter, and customer design wins grew by 25% on the back of both innovation and strong commercial execution of our teams. In addition, the Vitality Index was above 20% of sales, which is nearly double last year's performance. Moving on to the Medical Solutions segment. Revenue in this segment grew 15% year-over-year, better than expected. This segment saw a book-to-bill of 1.04 in the quarter and bookings were up 40% year-over-year. New product sales grew by nearly 45% year-over-year, and the vitality in this segment was above 30% of sales. Customer design wins grew at strong double-digit rate. Our Advanced Surgery business experienced 11% growth year-over-year, driven by both strong patient procedural growth rates and from our new product launches in our second-generation insufflators, which continue to see very favorable demand from our OEM customers. In our Precision Medicine business, which predominantly serves the life science and multi-omics market, sales grew by 18% year-over-year. The year-over-year growth in this business was mainly from the Keonn acquisition. Our core business also saw modest positive growth of 2% in the quarter from products sold into hospital equipment markets. Overall Medical Solutions segment adjusted gross margins were approximately 43%, which is roughly flat year-over-year, but up 80 basis points sequentially. While not as evident in the first quarter margin results, we see the same inflation challenges in the Medical Solutions segment as elsewhere, but strong productivity and higher margins from record new product sales helped mitigate the impact. Now turning to guidance. The end market trends that Matthijs commented on earlier give us increasing confidence in our outlook for the year. The first quarter beat and excellent bookings positioned us well to deliver on a strong 2026. We are leaning in aggressively on further price and cost reduction actions to give us greater flexibility as the environment evolves. These actions are already underway and embedded in our second quarter's guidance and our second half expectations. So for the full year of 2026, we now expect GAAP revenue to be approximately $1,040 million to $1,055 million, which raises our previous range and represents reported growth greater than 7% and organic growth of up to 6%. For the rest of our full year guidance, we are reaffirming our previous range. We continue to expect adjusted EBITDA to be between $245 million and $250 million, which represents year-over-year growth of 11% to 13% and adjusted earnings per share to be in the range of $3.50 to $3.65, representing year-over-year growth in the range of 6% to 11%. We have high confidence in this updated full year guidance, supported by strong committed bookings visibility, solid execution of new product introductions and positive end market dynamics. We believe the right discipline is to incrementally increase the top end and narrow our overall revenue range now, then deliver another strong quarter to shrink the remaining exposure to trade and geopolitical uncertainty before considering a more bullish overall financial outlook. Turning now to the second quarter of 2026. We expect GAAP revenue to be approximately $259 million to $264 million, which represents year-over-year organic growth of 6% to 8% and reported revenue growth of up to 10%. This revenue outlook is higher than our prior expectations, supported by strong visibility from booking strength and a growing backlog. Looking at growth in our segments in the second quarter, the Automation Enabling Technologies segment is expected to achieve 10% to 12% growth versus the prior year, which represents an acceleration in growth rate versus the first quarter based on building momentum we see in both businesses. The Medical Solutions segment is expected to achieve high single-digit growth in the quarter. Our Advanced Surgery business is expected to continue to show strong growth from the strength of new product ramps, while our Precision Medicine is expected to also experience mid-single-digit revenue growth from stronger sales of medical equipment and Keonn. For adjusted gross margins, we expect the second quarter to come in at approximately 45.5% to 46%, roughly flat to modestly ahead of the first quarter. The sequential improvement will be moderate as our surcharging adjustments, price increases and cost reduction initiatives fully take hold. That said, we expect these actions to drive meaningful stronger margin performance in the second half of the year as their full benefit is realized. On the pricing and surcharging front, we have already implemented product price increases and updated all surcharges to reflect the new tariff rates. The latter will have a more immediate impact. Both are embedded in our new quoting activities, and we're actively working to reprice existing backlog. In addition, while we have not included any benefit from potential U.S. government tariff refunds in our guidance, we view this as a meaningful risk buffer against any delays in implementation. The combination with the site closures from our regional manufacturing strategy and the additional cost actions, we feel confident in the second half ramp in gross margins and our full year expectations. For R&D and SG&A expenses in the second quarter, we expect approximately $74 million to $75 million. This represents roughly 28% to 29% of sales. The guidance excludes expected costs associated with our manufacturing MRP system. Depreciation expenses, which were approximately $4 million in the first quarter, will be similar in the second quarter. Stock compensation expense, which was $10 million in the first quarter is expected to be approximately $10 million again in the second quarter. As a reminder, our second half of 2026 is impacted by the timing of some of our equity awards, which includes onetime award that was granted in mid-2025 to replace the normal employee cash bonus program for the year. Stock compensation expense in the second half of the year will normalize to $8 million per quarter. For adjusted EBITDA for the second quarter of 2026, we expect to be between $58 million and $62 million, representing high teens increase year-over-year, and we expect to achieve approximately a 23% EBITDA margin, which is more than 100 basis points higher than the prior year and quarter. Interest expense net of interest income was approximately $2 million in the first quarter and is expected to be similar in the second quarter, excluding any material changes in debt balances. We expect our non-GAAP tax rate to be between 20% and 22% for the second quarter of 2026, roughly in line with prior year. The exact rate will depend mainly on jurisdictional mix of income. Diluted weighted average shares outstanding will be approximately 41 million shares in the second quarter, in line with the first quarter. As a reminder, this includes an estimate of the dilutive effect of our recent equity offering and as explained in detail in our filings, the dilutive effect of the equity offering can vary based on market prices and Novanta common shares. So this guidance only factors in the estimate for dilution based on the recent share price performance. For the second quarter, we expect diluted earnings per share to be in the range of $0.81 to $0.86, representing year-over-year growth in the range of 6% to 13% year-over-year. We expect cash flow conversion in the second quarter to remain similar to the first quarter and on track to hitting cash conversion of greater than 100% of GAAP net income. Our teams have been working rapidly to drive good cash flow performance despite the dynamic environment. Finally, I'll reiterate Matthijs' comment on our positive outlook for the acquisition pipeline. We have multiple opportunities under evaluation and are prioritizing transactions that meet our strategic and financial criteria and are walking away from those that do not. We are targeting acquisitions that enhance our growth profile, lower the cyclicality and trade sensitivity characteristics of the business and deliver compelling returns with our payback horizons to justify the investment in capital costs without requiring heroic assumptions. As stewards of shareholder capital, we are committed to deploying capital in a disciplined manner, and we feel confident about the progress we're making. In summary, we are making strong progress in the high-growth end markets that anchor our strategy, particularly in AI-driven Robotics & Automation, minimum invasive and robotic surgery, digital manufacturing and Precision Medicine. We are excited about our customer wins, the bookings growth and the continued momentum of our new product launches. We see growing momentum and strong customer demand, which gives us confidence in our ability to achieve mid-single-digit organic growth or higher for the full year. This concludes our prepared remarks. We'll now open the call up for questions.

[Operator Instructions] The first question today comes from Lee Jagoda with CJS Securities.

So Matthijs, at the end -- near the end of your prepared remarks, you talked about the DUV, EUV lithography, the board drilling technology and a whole bunch of other things that you lumped together as 15% of total company revenue. That's not all semiconductor. So what are we calling it now? And how should we think about that going forward?

Yes. Lee, basically, there are parts of our business in both Precision Manufacturing as well as the Robotics & Automation units serve applications that are driven by the GenAI infrastructure investments. So we thought it was good to quantify the combination of this, but they're basically inside those two businesses, just to be clear. Yes. And so it's a whole slew of applications. It's not one, right? And the collective of all that, that is driven by the GenAI infrastructure investments is 15% of sales in the first quarter. growing at 20% year-over-year, and we expect that growth rate to actually accelerate and improve throughout the year. It includes current core business to deep UV, EUV lithography, new product ramps in deep UV and EUV lithography, GPU drilling, but also advanced manufacturing aspects like probe card production, which is used for GPU testing. You need a very advanced manufacturing technique that is especially suited for our advanced subsystems for laser beam steering -- but other applications that include metrology for those really advanced 2-nanometer nodes. Those GPU chips require a lot of metrology. And so these advanced wafer fab nodes require super precision, let's say, both lasers as well as, let's say, motion. And so our robotics, precision robotics capability is also geared towards these, let's say, high-end nodes or these advanced nodes. So it's all that collective that we felt was important. This is, by the way, not your standard wafer fab equipment. So this is really the advanced nodes that truly are geared towards the wafer fab equipment and advanced manufacturing and advanced industrial manufacturing applications that are being pulled forward through GenAI infrastructure investment.

Got it. And then can you talk a little more about this NVIDIA AI lab announcement, how it positions you within the robotics space? And how we should think about some of the opportunities in growth hitting the P&L at some point?

Yes. Well, first of all, it's a testament. We're the only servo drive manufacturer as far as we are aware that actually got selected. You need to go through a very rigorous certification process. And so what that means is that, yes, our drives are being tested and have been certified in the NVIDIA ecosystem. So whenever there is humanoids and warehouse automation or other precision robotics OEMs that want to use the NVIDIA infrastructure, they want to make sure they use the sensors and, let's say, other technologies that are certified and work within that ecosystem. So we're very proud to be associated with that. So what that practically means is that while these applications are still in the prototype phase, it just adds tremendous credibility and avoids, I think, for OEMs to actually having to subtest and verify the claims that we're making because they've already been verified by the ecosystem. So that credibility, we see tremendous interest as a result. Again, we're tempering the excitement because still the -- we're still early in the adoption cycle. We expect it to be more meaningful in 2027, but we do see some more meaningful prototype orders coming our way as a result.

The next question comes from Brian Drab with William Blair.

You had this incredible bookings number in the quarter, up 37%. And I know you took the growth expectations, the organic revenue growth expectations up a little bit, too. But can you talk about the difference between those two growth rates, maybe reconcile the bookings growth with the organic revenue growth expectation? And do some of those orders ship in 2027?

Yes. The majority of the orders will ship in the next 12 months, right? So just to be clear, the other thing is just to be fair, it's off a lower number in the first quarter of last year. So that's the second. Third, typically, the first quarter does include, let's say, orders that certain customers prefer to place full year orders on us. So there's a little bit of that -- but the majority is actually a representation of strong demand that we're commenting on, right? And so you do see, let's say, Precision Manufacturing, of course, coming off a lower level, but there's sequential -- this is the fifth double-digit bookings growth, and you then see about two quarters to three quarters of lag, right, let's say, two quarters between bookings and revenue. So that's typically what we see. This is why we're -- we highlighted and confirmed our confidence in the year. But also at the same time, you see us being disciplined because, of course, it's an interesting world out there, and we just want to be disciplined at the start of the year and get one other strong revenue quarter and profit quarter behind us before we make further adjustments.

Got it. Yes. Understood. And then if you look at your opportunities in the industrial business, which there are many, but if you look at the opportunities this year in industrial, and I wonder if you could kind of rank order them in terms of contribution each will make to overall revenue growth in '26 or how you expect that to play out? So I'm thinking about the ones that are going to contribute the highest number of incremental dollars in '26 versus '25 and would love to hear where applications like EUV, DUV, warehouse automation, metal 3D printing components, GPU drilling, humanoids, like how -- which are the most impactful to growth this year?

Yes, Brian, I hate to give a nonresponse, but it's actually all of the above. So it's not a single thing, and this is sometimes the challenge with Novanta. We serve all these little niche applications that collectively actually add up, right, to a meaningful amount. And so I think that's also the strength actually. It's not one thing that can turn back on you, right? So if you look from an end market perspective, it is the need for advanced manufacturing that actually is driven by GenAI, but also driven by other markets like aerospace or drone manufacturing or just a need to come up with new manufacturing techniques. Additive manufacturing has a resurgence just because of tariffs, right, and reshoring. And it now achieves as a result of our technologies, a throughput and a cost base that actually becomes realistic -- to use this manufacturing technique. So -- but it's not one thing. So I would say that's why we're quoting all these things because they're all roughly similar in size. So I'm not able to rank order them here. If one really steps out significantly, you will make sure to make a note of that. That's also why we said, hey, the GenAI infrastructure investments is a collective of multiple applications that ultimately make their way through three steps in the value chain to a data center or to actually the manufacturing process in wafer fabs of a GPU chip, right? So there's a lot of steps in there. And then within that, certain steps were part of.

Yes. That's helpful. And it's helpful how you kind of categorize the AI data center portion of the business. And if I could just ask one more related to that for the moment. The Westwind business, you called this out in -- I think it was the second quarter call of '23 as a business that was doing just about $2 million in revenue per quarter after the downturn in China, et cetera. That business seems to have really caught a tailwind. And I'm wondering if you could just elaborate on what -- I know it's GPU drilling, but if you could just elaborate on what the opportunity is there and -- and can I ask you to try and help us size it? I assume it's not $2 million per quarter now. And any sort of additional color because you've generated a lot of interest in that business over the last couple of quarters mentioning it in terms of GPUs, and we all know how fast that industry is growing.

Yes. So Brian, it's Robert. Just as a reminder, the robotics portion of our business is roughly 20% of sales. The semiconductor business is roughly 10% of sales, right? And embedded within our semiconductor are things like GPU drilling as well as EUV/DUV-based applications, right? So if you look at that overall segment, is it going to outpace the overall business? No. It's likely going to -- it's going to obviously augment the robotics portion of the business and the semi portion of the business will grow at a little bit of a faster rate than our advanced manufacturing, which represents 50% of sales. But overall, those things will pace in check with each other. And that's based on the commentary that Matthijs made earlier. So I would look at it as overall semiconductor is roughly about 10% of sales. It should not materially change as a percent of sales. We have high growth coming in our medical side of the business as well. So everything is kind of keeping pace. Nothing is going to like outpace something else dramatically.

Yes. And I would say, Brian, that, listen, it's not unlike others. I mean, we have unique competencies and capabilities where we're often the only ones in the world or maybe there's one other player that can do what we do, right? And so when we quote these GenAI infrastructure aspects, those are niche leadership positions that we have where we're uniquely positioned. And it so happens that in certain cases, it's really helpful for GenAI infrastructure, right? And this GPU drilling is part of that. But there's many other things. And so the message we're trying to convey is the collective that makes it strong and repeatable versus just highlighting one single business.

Okay. And in this business, I think -- I don't think it's really clear to most people -- I mean a lot of people don't -- have never heard of an air bearing spindle but I mean this business is special because it replaces ball bearings and I think spins at 300,000 RPMs or something like -- why are you the only ones that can do that?

No. Well, I'm happy to explain it. So for these new GPU boards, the boards are really thick. There's about 40 layers, right? You can imagine that if the board is thinner, typically, people prefer to do laser-based drilling because it's precise, it's faster and it's -- you can create tinier holes. By the way, we do that as well, right, the laser beam steering subsystems that we have are actually market-leading in that as well. And there was a trend towards more laser-based drilling for obvious reasons, driven by mobile phone, et cetera. The data centers and these GPU boards, they require a lot of power, as we all know. So a lot of currents that will create -- that need thick boards that need to be drilled and that needs to be done mechanically. -- lasers cannot penetrate those yet. And we're the #1 by far leading in this area. So we're the only ones who can really do this in a way that requires the level of throughput of precision and form factor, all the elements we typically quote that we're uniquely positioned for in our businesses. And so that's what this is. But again, there is a whole slew of applications that we serve in this market. This is just one of them. It just shows our type of leadership in niche technology applications.

The next question comes from Quinn Fredrickson with Baird.

Yes. Just on your EUV and DUV wins, I think you were talking about that ramping more significantly later this year. I'm just wondering, is there a potential that moves up with the strengthening semi market? Or is that something you're already seeing?

Yes. So Quinn, we have both core business today that we see growing very nicely in line with the growth rates that I mentioned for the GenAI piece, right? And then we have a new piece of business that we -- that has been delayed in the past, but we feel very good about that it will ramp this year. in the second half of the year. Yes. So that will start to accelerate in the second half and will be more pronounced in '27, but will contribute pretty meaningfully already in the second half of this year.

And then geographically, any commentary you could share across your key regions -- perhaps specifically, if you could double-click on the U.S. as I think that was the only region that was down year-over-year, that would be helpful. And then maybe the degree to which your regionalization strategy you feel is helping growth across some of the other regions?

Yes.

Just as a reminder, our sales to regions are really shipping to factories of our customers, and so may not be representative of the end market demand in that area. So -- for example, the U.S. markets, generally speaking, are stronger right now. And yet when you say the sales are down year-over-year, that's just the fact that there's some shift of where our customers produce those products more than anything else. They might have shifted some production down in Mexico or Costa Rica, and now we're shipping to those locations instead of a U.S. location or they've done their own regional structuring. And so we are now splitting shipments where a smaller allotment will go to a U.S. factory and then some allotment will be shifted to a European factory directly. So be careful about looking at it as like an end market dynamic. I would say, to answer your question more directly, we've had -- where we're seeing the growth is predominantly U.S. We are seeing growth in China. That growth in China is very specific to some semiconductor-based applications and some industrial applications. And then most of the growth that we see in Europe is on the medical side.

I see. Okay. And then the last one would just be on the price/cost timing impact that you mentioned, Robert. Maybe if you could just give us a little more color on what drove that? Was freight the main unexpected driver? Or did something change on the tariff front to the detriment? And just how we should think about the timing of fully closing that gap?

Yes. It's a great question. I would start with tariffs. They were thrown out by the Supreme Court and then rapidly reimplemented and then rapidly escalated again. So the tariff rates changed within a 4-week period in certain categories like aluminum, as an example, went from a 25% tariff to a 50% tariff. The tariffs were applied to immediate shipments, so both inbound and exports. And so it's something very difficult to get your systems to kind of really quickly adapt to. And so that was, I would say, the bigger element. There were certainly higher freight costs. I would argue most of the higher freight costs were customers like the 3PLs, the FedEx, not customers, but vendors like 3PLs, the FedExes, the DHLs of the world rapidly adjusting faster than us on the surcharging. And so that resulted in higher kind of freight charges. We have pivoted. So we've implemented new surcharge rates. Those are based upon the higher rates that are in place, not only today, but the ones we're expecting to come into place as we get into the second quarter and the third quarter. There are expected to be a couple more tariffs there. We factor that into our surcharging -- to augment that. We've increased price across our products. That has now been implemented on all quoting activity. where teams are going through and repricing the backlog based on those dynamics as well. And so they are adopting the new rate structures, the new pricing structures and you're starting to see that materialize very quickly into our results, which we expect to start to unfold in the third quarter. And that's just the fact that we've already booked 2/3 of our revenue for the year. And so as a consequence, we really have to kind of go through a repricing initiative. I would expect, though, that the tariffs to be completely muted again in the second quarter and then us moving into a positive price cost ratio as we get into the third quarter, which drives that uptick in gross margins in the third quarter. And then not to rely solely on that. We have taken some cost out. We finished up the regional manufacturing strategy for our Precision Manufacturing business. We've closed the two sites that were -- have products moving into them. And then what we didn't do is we decided not to factor in any sort of tariff recovery, which is becoming a dynamic where there should be some positivity around that, the timing of which we can't predict right now. But I would say that, that provides a little bit of upside and a little bit of contingency just in case not everything falls out the way we think. So we have a full year guide that we feel really confident in. We have profitability expectations that we feel really strongly about, particularly in the back half of the year. We'll give another quarter and then we'll take a revisit and see whether or not we can make some further adjustments given the positive momentum.

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. Just to wrap up, the first quarter was a strong start. Organic growth inflected upward, profit and cash flow grew meaningfully year-over-year, and the business is executing. The second quarter guidance reflects another meaningful step-up and further momentum based on broad-based demand signals across our businesses and the pace of new bookings, new product revenue growth and design wins tell us our customers agree. We're confidently reaffirming our full year outlook and even more confident that we can navigate the path ahead. Novanta's trajectory from here is up. 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 second quarter earnings call.

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