Good day, and welcome to the Zebra's Second Quarter 2021 Earnings Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. . Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead.

Good morning, and welcome to Zebra's second quarter conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year.

Thank you, Mike. Good morning, everyone. And thank you for joining us. Our team delivered exceptional second quarter results with strong performance across the business resulting in record sales and profits. For the quarter we realized adjusted net sales growth of 44% or 40% on an organic basis; an adjusted EBITDA margin of 23.6%, a 530 basis points year-over-year improvement. Non-GAAP diluted earnings per share of $4.57, a nearly 90% increase from the prior year and strong free cash flow. Despite ongoing industry wide supply chain challenges. Our teams successfully satisfied stronger-than-expected demand from customers both direct and through our distribution channel. Similar to Q1 we realized robust broad-based demand with double-digit sales growth across all four regions, each major product and solutions category, as well as in all of our vertical end markets. Our customers continue to digitize and automate their workflows with a sense of urgency in the increasingly on-demand global economy. We also significantly expanded profit margin across our business more than offsetting escalating global supply chain costs. We also continued our balanced approach to scaling operating expenses, while investing in initiatives to drive sustainable profitable growth.

Thank you, Anders. Let's start with the P&L on Slide 6. In Q2, adjusted net sales increased 44.4%, including the impact of currency and acquisition, and 39.8% on an organic basis, reflecting broad-based demand for our solutions from customers of all sizes. We realized particularly high growth from our run rate business through the channel partially driven by pent-up demand, while continuing to see strong growth in direct sales to large customers. Our Asset Intelligence & Tracking segment, including printing and supplies grew 51.2%, while Enterprise Visibility & Mobility segment sales increased 35.1% driven by exceptional growth across all major categories, including enterprise mobile computing and data capture. Note that we also realized double-digit growth in services and software along with very strong growth in our RFID solutions, for which deployment activity has snapped back as this customers recover from the pandemic. We recognized double-digit growth in all regions. In North America, sales increased 39% with all major categories growing double-digits. In EMEA, sales increased 44% with solid growth across sub regions and solutions offerings. APAC again realized strong growth with sales up 20% led by strength in China, Australia, India and Japan. Latin America also continue its recovery with exceptionally strong growth in all sub regions with sales increasing 79%. Adjusted gross margin expanded 390 basis points to 48%, primarily driven by favorable business mix, a $12 million recovery of Chinese import tariffs, higher support service margins, and contribution from our recent high margin acquisitions. These benefits were partially offset by higher premium freight charges, which we'll discuss further in a moment. Adjusted operating expenses as a percentage of sales improved 180 basis points. We continue to scale OpEx, while prioritizing high return investments in the business. Second quarter adjusted EBITDA margin was 23.6% a 530 basis point improvement from the prior year period, reflecting higher gross margin and operating expense leverage. We drove non-GAAP earnings per diluted share of $4.57, a $2.16 or 89.6% year-over-year increase. EPS growth also benefited from lower interest expense, partially offset by a slightly higher tax rate. Turning now to the balance sheet and cash flow highlights on Slide 7. We generated $514 million of free cash flow in the first half of 2021. This was a $192 million higher than the prior year, primarily due to increased profitable growth. In Q2, we acquired Adaptive Vision for $18 million to advance our Machine Vision solutions and made $4 million of venture investments.

Thank you, Nathan. I'm encouraged by the strengthening demand across our business, which allows us to further increase our 2021 outlook. Slide 11 illustrates how we're working with our customers and partners to advance our Enterprise Asset Intelligence vision, by leveraging Zebra's industry leading portfolio of products, solutions, software and services, our customers can overcome some of their most complex operational challenges and transform their frontline workflows to achieve higher levels of performance. We help businesses across industries implement tailored solutions that digitize and automate their operations, enabling them to compete more effectively. With our innovative solutions, our customers associates can now anticipate and react in near real time, utilizing insights driven by advanced software capabilities, such as artificial intelligence, machine learning, prescriptive analytics and Machine Vision. Now turning to Slide 12. As a trusted strategic partner, businesses in a variety of end-markets turn to Zebra to help optimize end-to-end workflows. I would like to highlight several recent wins across our end-markets, which demonstrate how Zebra Solutions are improving productivity, customer service and patient care. Large European Postal Service will be deploying approximately 80,000 TC27s to their carriers. Continuing a long standing relationship, they're upgrading to the latest mobile computing solution, which will enable them to more effectively handle increased parcel volumes and a broad range of use cases. It's another proof point of successful collaboration with post and parcel services around the globe, including our current business with the United States Postal Service. We're also helping a large North American steel manufacturer to optimize and digitize its operations. This customer is adding more than 1,000 of our ET56 tablets to their operations, which will allow them to eliminate manual paper processes by implementing electronic proof of delivery to automate and expedite the invoicing process.

Thanks, Anders. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up, so that we can get to as many of you as possible.

We'll now begin the question-and-answer session. Your first question comes from Damian Karas with UBS. Please go ahead.

Hi, good morning, everyone.

Good morning.

So I just wanted to ask you a little bit about the component shortages, obviously still we're able to drive some pretty strong growth in the second quarter and expecting to see that in the third quarter as well. But would you be able to quantify how much of a drag if any of the component shortages are on your sales this year?

Yes, I'll start and then I'll have Nathan to also help out here. So the first - I'll start on the kind of industry wide semiconductor shortages. They've been very well documented by the press, obviously over the last few months, and we're impacted. So the impact though is not uniform across all components, some components are impacted much more than others. But it's much larger number of components that we can have working that we would do in a normal quarter. But I'd say our team is doing a great job in working all angles to optimize our allocations. And there's been great collaboration between our sustaining engineering groups to ensure we can qualify new alternative components that have less lead time. So to ensure, we get as much available product to provide to our customers as we can. We did raise prices here recently to mitigate some of the impact of the increased component costs. And so despite these shortages, and the price increases that we have increased, we're quite confident in the increased full-year outlook that we announced today.

And Damian, just to answer the question on the Q3 and full-year guide, the risk associated with the shortages have been incorporated in our outlook, but it'd be really tough to quantify, I think it will be really constructive to speculate on what that number could be unconstrained.

Okay, that's really helpful. And then wanted to ask you a little bit about the frayed headwinds. I mean, second quarter despite having those I think you were able to outperform on the margin front. So just curious, why we shouldn't - but you're expecting a pretty abrupt drop here 300 basis points in the second half. Why would - shouldn't we expect you to kind of be able to manage those as we're in the second quarter. And I guess additionally in - should we be thinking that next year, you will be able to kind of completely reverse these premium freight expenses?

So, maybe if you take us to back on just where we're seeing the bottlenecks, because there's really three different areas in terms of - and the incremental costs. One, which we've seen earlier in the year we've talked about in our previous calls around the lower international commercial air travel, container shortages, port congestions around the supply side of it, that's where we're seeing our air and ocean rates 2 to 3x since the start of the pandemic. And those really have not come down over the last several months. If anything's oceans gone up, air rates have stabilized. In addition, because of the global supply constraints along with increased global demand, we're now expediting component parts from our Tier 1 and Tier 2 manufacturing partners. Along with shipping a higher percentage of printing perspective - in particular via air versus ocean. And so those are also really driving the step change in terms of the transitory cost from Q2 into the second half. In addition, you have the manufacturing shutdowns in parts of Southeast Asia, and particularly for us, Vietnam and Malaysia due to COVID that have further constraint supply. So as we see today, you're expecting the impacts to persist at least through the end of the year. It's hard to say when those will abate into next year. But again, the team is doing a great job of managing the impacts with our customers really through extraordinary actions and communicating the lead times. So as you look at our second half guide, I think there's two things to think of. One is the step change increase in terms of the incremental cost. And in Q2, we also had $12 million of China tariff recovery that we don't expect to repeat in the second half that was an offset in the second quarter.

Understood. Thank you very much for the insight. Good luck.

Thank you.

Our next question comes from Tommy Moll with Stephens. Please go ahead.

Good morning, and thanks for taking my questions.

Yes.

Anders you've talked about a robust backlog and pipeline. Any comments you could give to augment there would be helpful. Do you have any sense of whether the momentum is sustainable through the year-end and even in the next year? And any comments you could give us on channel inventory levels as best you understand them would be appreciated as well? Thanks.

Yes. I will start here. And then I'll ask Joe, he'll also provide some color. And you're first may be we obviously very excited about and pleased with the performance we had in the second quarter. We exceeded the high end of the guidance range here. To the previous question, the extraordinary collaboration between our supply chain and sales teams to satisfy a very strong demand in a supply constrained environment. The strong secular trends that have been supporting our business for a long time, they have accelerated through COVID. And we don't see any abatement in those trends they're continuing to build. I'd say our customers across pretty much all our vertical markets are prioritizing how digitizing and automating their workflows. I think omnichannel is probably the best example. In retail of - the retail vertical or most retailers investing meaningfully in building out their omnichannel capabilities and digitizing their operations that way. We did see double-digit growth in all regions, as well as across all our product and solutions categories as well as across our main four main vertical markets. We did see our small and medium sized customers do particularly well. So the growth we saw here was definitely part - too large to be driven by our small, medium sized customers. And that was partly I think a result of pent up demand. But we see that largely being behind us at this stage. But even our large strategic accounts performed very well with strong growth. And based on this performance, I do expect that we will continue to take share in the market. Our inventories are healthy in the channel today, but it may be at the lower end of our expected ranges. Joe.

I think that's fair. I mean on the inventory side, we're working hard with our distribution partners to keep our inventory at the levels that we need to sustain the demand. But at the same time to serve every possible demand, which is at the moment as you can tell very, very strong. And we're trying to serve all of the demand we can, and taking our inventory to the lower end of - what we consider our healthy range. When it comes to the backlog in the pipeline. It is very strong as you're seeing, and what I can underscore when Anders was saying this, pandemic has definitely triggered a wave of digitization and automation in our customers that is leading to projects and demand that we did not see before the pandemic. So that is a sustained driver of momentum that we see. And we also were enjoying because customers are aware of the supply shortages. We're enjoying good pipeline visibility, our customers are working with us to give us that visibility far in advance. And that gives us confidence for continued growth into the next year.

Thank you both. Those are helpful answers. Anders, I wanted to follow-up with a question on Adaptive Vision and your entry into the Fixed Industrial Scanning and Machine Vision markets. A couple part question here does it any context you could give us around any prior relationship you had with Adaptive Vision or how you came to know the asset. Anything you can do to frame the size of the market opportunity where you think you've got a good shot at competing? And then what advantages you bring in those markets they're adjacent to the markets where you currently play and have substantial share, but what advantages do you bring in these new markets? Thanks.

Yes, I'll try to summarize this here. But firstly, we're excited about the - our entry into the Fixed Industrial Scanning and Machine Vision market. These are solutions that really accelerate our enterprise as an intelligence vision. This is more on the sense side of the sense analyze act framework, but it helps us to provide some new ways of capturing data that we can then analyze and enable our customers to act on. This is a very attractive market we see, but it's quite fragmented. It's a multi-billion dollar market that our new portfolio then can address. Although we're not addressing the entire market on day one, but we're continuing to invest in it to add functionality, to add capabilities so we can go after bigger and bigger part of the market and be ready for folks in initially mostly on the text industrial scanning market. Our value proposition we believe is very strong and their focus is on ease of use of these types of solutions as well as the ability to upgrade cameras and devices in the field. So those are we believe two strong differentiators that we have. The Adaptive Vision is a great way for us to augment the cameras that we had and the software we had developed. It's a way for our customers to more easily be able to develop and build and implement applications for how to basically engage in Machine Vision or Fixed Industrial Scanning or incorporating Machine Vision and Fixed Industrial Scanning into their workflows. And we've been familiar with Adaptive Vision for some time and we've been looking at ways to augment our own internal software development in that area to make sure we can come up with a really strong offering and we felt that Adaptive Vision had a very attractive solution, very strong solution and there was a nice fit with Zebra.

Thanks, Anders. I'll turn it back.

Our next question comes from Jim Ricchiuti with Needham and Company. Please go ahead.

Hi, good morning. Thanks for the additional color on some of the costs issue that you're incurring in terms of freight and components. I wonder if you could spend a few moments talking about OpEx, both sales and marketing. G&A up by a healthy amount sequentially, admittedly with those significantly higher sales, but I'm just wondering how we might be thinking about OpEx in the second half of the year. And I have a follow-up Anders, for you on some of the acquisitions?

So I think from an OpEx perspective, if you look year-on-year, there's a couple major drivers in terms of the overall increase that really impact every quarter. The first was last year, we took some actions mid-year around salary reductions in the peak of the pandemic to help offset the impact as well as lower incentive comp, as we're obviously below our plans and targets for the year. So those two alone drive a significant increase year-on-year along with a full-year of Reflexis in the P&L and starting to again, invest particularly in R&D and go-to-market with some of the discretionary costs increases. So if you look for the second half of the year, I'd say the ramp in the first half will continue. But I wouldn't expect to see a real step change increase from where we saw spending in the second quarter. But again, the year-on-year increases are all pretty consistent for each quarter.

Thanks, Nathan. Anders, you talk about the acquisitions, both Adaptive and Fetch, you talked about I think is being a fragmented market. And I'm wondering to what extent might we see you in addition to internal development of these technologies look at potential additional M&A to expand your footprint?

Yes, it's obviously hard for me to comment on specific opportunities here. But we're excited about both of these markets, the Fixed Industrial Scanning, and Autonomous Mobile Robot markets. And we have had long standing organic development activities that we now have augmented by the acquisitions of Fetch and Adaptive. But I'd say first, more generally about M&A first we're very excited about our business and the outlook for our business and we do see M&A as a vector for growth. I think the Adaptive Vision or the Fetch Robotics acquisitions are, we're excited about them, we think that we can deliver good growth and good returns on those. But we do look at all M&A opportunities as a way for us to accelerate and advance our EI Vision. We're targeting selective bolt-on acquisitions that also have high growth. Look at around, what I talked earlier about the customers need an interest in digitizing and automating a number of workflows across all of their supply chains. So that provides good opportunities for us to continue to add to our capabilities. And so we do look at M&A as a way for us to accelerate that growth. And we have a strong balance sheet that can support M&A activities also.

And your pipeline for M&A?

Yes, we obviously have a team that looks at the scans kind of the market broadly around our target areas where we have particular interest. There is a - we have a good healthy pipeline over opportunities. You never know what will work out, where we'll come to terms or not, but we do have a healthy pipeline of opportunities.

Thank you.

Your next question comes from Paul Chung with JPMorgan. Please go ahead.

Hi, thanks for taking my questions. So, just another follow-up on Machine Vision fixed industrial scanner. So, how large is this business today and will the solution eventually kind of be led with software similar to your peers kind of resulting in very accretive margins, what is the strategy to kind of take share from larger players in the industry, maybe competitive pricing and then another on M&A in general, very strong free cash flow, high quality earnings provides you kind of a nice cushion for broader opportunities. Should we expect kind of continued preference for software solutions over time and resulting kind of higher margins longer-term?

Yes, I'll start and I will also ask Joe to comment on this here. But I think your first question was around the Fixed Industrial Scanning Machine Vision market. We believe it's a very attractive market, it's near adjacency to what we do. And it's a quite a fragmented market, if you looked at the market share table there, there's one or two players that have resource share, but then it's a long tail of smaller players, we're entering the market primarily through our or initially with our Fixed Industrial Scanning portfolio, which is the closest to our core competencies and the use cases where we have a very strong right to play. But we are adding both, say on the capabilities both on the hardware side, on the camera side, but primarily here on the software side to be able to then address a larger part of that market. Software is a big differentiator in all our devices, right, if you look at mobile computing, print and scan, the majority of our engineers, a huge part of the differentiation in the value add comes from the software. And we certainly expect that to be the case here also. So we're investing in building more of that software capability, that division was in inorganic way to accelerate some of that, but we also do that organically. We should also not underestimate or minimize the importance of the investments we're making in the go-to-market. I mentioned earlier, I think that we're putting in specialized to track in our PartnerConnect Reseller program to specifically address recruiting Fixed Industrial Scanning and Machine Vision partners to help accelerate that growth. Maybe Joe, you can expand on that a bit?

Yes, exactly. I was going to comment specifically on your question about what's our strategy to take share. So you know that we have the Fixed Industrial Scanning and the Machine Vision parts of - Fixed Industrial Scanning is a natural extension of the leadership that we have in the scanning part of the market. And we're of course translating that technically, to succeed in the Machine Vision part, that's where the software piece is essential. And the acquisition of Adaptive now gives us industry leading software capability. So we fully expect to translate that into share gains. But there's more to it than that, we specifically want to use the software to enhance that ease of use value proposition that's critical to these customers, how easy is it to use and to deploy and that's also important for the second part of the strategy to win which is using partners as a way to compete in this market. All of these solutions are deployed through partners. For us, we're a very partner centric company, as you know. And that is also what we're going to use to compete and win in the Machine Vision space and making our software easy to use is a value proposition not just to the end-users, but to those partners specifically. So hopefully that's helpful.

Yes, very much and lastly on Fetch Robotics, I know it's early days, but if you could talk about how you see this business ramping, how material revenues can be over time, kind of from a small base, the margin outlook, competitive environment, all that good stuff, some key customers, you hope to get, some cross selling opportunities. And if you could expand on kind of use cases beyond warehouses and fulfillment centers? Thank you.

Yes, that's a broad question, it can take a while to answer all of it. So I tried to give you a high level response here. But first, we haven't closed on the acquisition yet. But we are certainly excited about it. We have worked with Fetch as a venture investment for quite some time. So we believe we understand the market, we understand the team and we see great opportunities to leverage the Fetch's broad portfolio of AMRs. They have the broadest portfolio of Autonomous Mobile Robots in the industry. And they have a very, very strong, very capable Cloud based software platform for how to deploy and manage these robots, then you'll see that, we've been more focused on technology enabled the workers in warehouses and by combining those two to be able to control and optimize both the flow of robots and the workers. We think we can offer a superior ROI to customers in manufacturing, in warehouses and a number of these use cases. Fetch has, say, initially been mostly focused on the markets. So more movement of goods. But we see there's a number of other use cases that are also growing fast where they have that solutions that are very well suited to pursue those also. And here's another area where I think our strength that we have in our go-to-market organization, I'll ask Joe to comment on this also, will augment as well, we know virtually all of these large customers in transportation logistics, in manufacturing, retail in whatever industry or vertical we're going after. And we can help I think with providing those introductions and position our broader automation workflow solutions with those customers.

Yes, a particular attribute of the market that we're focusing on is that we're targeting those areas where humans and robots work together. And so the notion of a Cobot, right, that collaboration between the two is at the heart of the strategy. So that means we're targeting use cases like person to goods picking, and conveyance. And those use cases allow us to take advantage of a broad installed base we already have, or workers in warehouses have mobile computers, and they're now being augmented by robots. So this means that we can take advantage of the orchestration between the two. And there's really no one else in the market that can do that to the extent that we can. And as a result, we're taking this strong platform capability that that Fetch has with robots that can go across a broader range of use cases than anyone else, and can deliver products with safety and speed that no one else can, and combining it with the orchestration of humans to achieve overall productivity improvements that are unequaled and that's really the strategy.

Thanks so much.

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Great, thanks. On the price increases, you guys noted, can you just give us a sense of the degree or how broad they were and how much like, are you expecting those prices increases to be transitory. So the channel may hold less inventory in the near-term, just how you see that interaction and just maybe a second question, just getting a sense of the Postal Service concentration this year, the USPS deal, so it's expected to be primarily Q2, Q3 of this year. Thanks.

I'll start and then I'll ask Nathan to comment here also, but first on the price increases, pricing is obviously something that is very important to us and something we continue to assess and address. We do regular checks to make sure that our solutions are priced competitively to the end users as well as our partner community have the right profitability, part of our overall go-to-market activities here. The competitive actions or competitive positioning is obviously a key part of how we assess pricing here. And we believe that the price increases that we have now announced are appropriate, they respond to some of the competitors who have also announced price increases but everybody hasn't. So we believe that we have kind of assessed this based on a very granular based on products and geographies to make sure that we don't put ourselves any competitive risk with these. We see the cost as being transitory, and we want to play this kind of a long-term game here, though of making sure we maximize the value of the corporation longer-term, we don't want to cede market share in the short-term for that either.

And then from USPS perspective, the rollout is progressing as expected, and as we communicated earlier in the year, this is for the current rollout of the full EMC solution of 300,000 units to the carriers and with the goal of completing largely completing here at the end of the third quarter.

Great. I mean just coming back to project, which is like is there just a range we should think of kind of on the - just on the top line of what that impact is across the portfolio or is that just too difficult to assess kind of at this point?

I'll take that, we just rolled the price increases out last week. I would say from a full-year perspective, it's within the margins from the full-year revenue.

Okay, great.

On the rollout price increases, there's a lag time between us announcing and being effective in the market. So you can see this will be impacting our Q4 business rather than Q3.

Okay, great. Thank you so much.

The next question comes from Keith Housum with Northcoast Research. Please go ahead.

Good morning, guys and congratulations on a great quarter. Just looking at the cost of goods sold here and the transport costs at being the premium freight cost. Is there anything in the adjusted EBITDA margin guidance and thought process as suggested some of the impact will be perhaps longer-term, for example, increased labor costs or anything else in there that again will perhaps go on beyond the rest of this year?

Yes, Keith the way into two buckets. If you look at the labor costs, or the raw material costs increases, that's what the price increases we've taken is meant to largely offset that. So if we think about from a mitigation of the inflationary prices, I think that's as we go into the fourth quarter and into next year, those would be largely mitigated with the price actions we've taken. And the logistical bottlenecks are the one that from the timing, I think, is still to be played out. Again, I think we expect but no changes between now and the end of the year. But really, we're taking kind of one quarter at a time and reacting accordingly to optimize and maximize profitability as best we can.

Okay, fair enough.

Maybe just build on that a little bit. So the logistics and the semiconductor component cost, we consider those to be transitory. On the labor side, there's always some upward movement in labor rates. But if you think of the amount of labor that goes into our cost of goods sold, it's very small. So that is not, it's single digits, I think high single digits, part of our value-add is from labor. So it's not something that meaningfully changes the P&L.

Got it, got it. And looking at your full-year guidance, Anders, historically you guys have always had a very strong fourth quarter sequentially big up tick from the second and third quarter, is the guidance you're providing here suggests perhaps even roughly a flat fourth quarter. So is there the thought process that the business has kind of pulled ahead during the year or how are you thinking about the fourth quarter, any potential upside to that?

Well, I think the fourth quarter, the implied guide for the fourth quarter that we had in our full-year number here which certainly would indicate this growth, not as strong growth as we've had in the first half or - we guided for Q3. But Q4 was a very strong quarter last year. So there was - we saw great recovery in the fourth quarter. But we do see continued strong demand from our customers, the momentum is very strong, we don't see that abating. This is more of a tougher compare than anything, Nathan you want to go or add anything to that?

Yes, I think from a sequential standpoint, Keith the terms of the typical update from Q3 to Q4, I don't think it reflects anything from a weakness in the fourth quarter as much as just strength we're seeing here in the third quarter. And as we've noted earlier, when you look at our days on hand inventory and the strength, I wouldn't say sales pull-ins are not a major factor. It's really just that acceleration of investment from our customer base. And if anything, where we're getting the visibility is in the backlog and funnel, as Joe mentioned in terms of giving us confidence in the full-year, particularly the fourth quarter guidance.

Okay, thanks. I appreciate it.

The next question is from Andrew Buscaglia with Berenberg. Please go ahead.

Good morning, guys.

Good morning.

So I wanted to ask on R&D, your spending this year on track, spent about $560 million or so. And I'm wondering how much of this or last call 12 months is related to this Vision and AMR kind of push. And then secondly, at what point could you start to really leverage that R&D line Do you need to be spending flat cost $550 million a year going forward?

First, I'd say R&D investments is a key activity for us, that is what really drives our longer-term growth. And I would say if you look back over the last several years investments we've made in in-product development, and R&D has had a great return for us. So we want to make sure that we have a portfolio of fresh solutions that offer real value to our customers that we can compete and grow the business. We look at our R&D investments across number of horizons, we can say our investments in our core that would have a very short-term return kind of the near adjacencies, which would have a little bit longer returns a couple of years to three years. And then more innovative new solutions, more of the enterprise asset intelligence type of solutions here, which we have a little longer-term payback as they're more ground up innovations. In many areas, you mentioned Fetch specifically, we developed our own robots with SmartSight before, so there certainly been a way for us to both learn the industry. But there's also attractive ways for us to leverage those investments across. So when we do make acquisitions, we see that as a great way for us to augment our own internal programs and drive us into new high growth adjacencies where we can make a difference. So that answers your question.

Yes, that's helpful. And if I heard correctly, you got the nice healthcare award this quarter it's like that that area is taking kind of a backseat to all excitement going on retail and e-commerce and logistics. But kind of - can you update us on healthcare in terms of, are you still seeing that narrative play out post-COVID where people are accelerating investments in automation there.

Yes, I think across all our verticals first. I mean COVID has accelerated the secular trends that we've talked about around our all our end-markets are driving solutions that help to digitize and automate their workflows and empower frontline workers to be connected and optimally kind of utilized. Each of our primary vertical markets grew double-digits in the second quarter. And we continue to invest in expanding into each of these ones. Specifically for healthcare I'd say, we saw healthcare - our healthcare markets, they started in more acute care, but it's been moving into other areas like outpatient, remote patient care, COVID testing, vaccine distribution. So our efforts in healthcare continues to expand into new areas. It's also expanding geographically. So the win we've talked about today was in Europe. And I think the paid healthcare patients are taking a book out of their e-commerce or kind of online shopping activities. Also, they're seeking a more digital experience, which is putting some extra pressure on healthcare providers to make sure they can offer similar type of experiences for the patients. And let's say here, our purpose built devices and solutions are critical for healthcare providers not only to improve the patient journey, but also to drive greater productivity for the healthcare providers.

Yes, I might add that. In healthcare, there's two other phenomena that will drive continued growth. One is that we know that healthcare systems depending on where in the world you are, this is in a different stage. Have pulled back on some of their spending, because they didn't have income from the elective procedures that they usually enjoyed. And as we come out of the pandemic, we see more of that income returning to for profit hospitals, and then their ability to spend on these solutions returns as well. And we've seen that, and the international growth is another big dimension. Anders mentioned the European piece, but we also see significant interest in different parts of Asia that we hadn't seen to that extent before. So they were the two more growth factors that we expect.

Just one more comment on this will be. I expect the healthcare to continue to be our fastest growing vertical over the longer-term. But it's great to see that, we have this diversity in the business across our main four verticals, and some other newer ones coming up. But in Q2 here, manufacturing, which was our fastest growing vertical. Manufacturing was the one that was the hardest hit by COVID-19. And the macro was a bit tougher going into that with tariffs and other things. But the opportunity to increase automation in workflows through wearables and heads up displays and the need to track and trace work are important sourcing components at sub suppliers through assembly all the way through distribution is putting - providing great opportunities for us. So all our vertical markets performed very well, but manufacturing was actually the strongest one for us in Q2.

Okay. Thanks Anders.

Last question is from Rob Mason with Baird. Please go ahead.

Yes, good morning. Thanks for the question. Anders or Joe wanted to get your thoughts on how quickly you thought you could pull together the channel. The partners to be able to sell the - your Fixed Industrial Scanning Machine Vision products. And I'm curious also if you envision those being two separate channels, or both products will go through the same channel. And then also relatedly, I guess maybe what percent of your existing channel is suitable to sell those products?

Yes, I'll start and Joe can provide some extra color here also. So, the - we have worked on our go-to-market strategy and our channel engagements. This is since we started working on the product and to solutions. So this is not something we can doing serially, this has been something we've done in parallel to a large degree. So we - you can say there's a Venn diagram of partners out there, their partners who we currently have, who are also in the Fixed Industrial Scanning Machine Vision space that we're obviously having a great - already not have a relationship with. And with EC expansion to add our Fixed Industrial Scanning and Machine Vision capabilities to their portfolio, but also recruiting new partners that are not necessarily see if our partners today, but they're strong in that space. And we've seen good interest and response rates for them, from them. And I think they have been impressed with our solutions. And they see how we can add value to them. So this is obviously a big part of what we need to do now and for the next year to ensure that we deliver the revenue growth that we are intending or planning for. But so far, I'd say that the response from the channel has been very positive.

Yes, I appreciate that. You're asking this question, because channel is central to our go-to-market strategy, right? We're very channel centric company. And, as we were designing this go-to-market approach, this we spent a lot of time on this. First week created a dedicated track in our PartnerConnect program, which is very important to serve the needs of these particular partners. A percentage of our current partners are also Machine Vision, distributors and sellers. I would estimate that that's a small percentage. The majority of Machine Vision partners, we do need to create, we no need to recruit - I'm sorry. And we have made great progress in recruiting these partners already. We have a very strong group of partners that have already signed up to sell this force. And that's because of what we were talking about earlier, that we've designed the product with a particular value proposition geared towards partners. We wanted it to make easy for those partners to deploy and sell the solutions. We think that's critical to success. And that's essential in how we've designed the product. And so we're very pleased with both the number of partners, we've already been able to recruit. And the pipeline of additional partners that we have that that is interested in selling our products.

Very good. Just one follow-up. Nathan, the China tariff recovery, it was a nice contribution in the second quarter. What's assumed in the third quarter or second half for that or the potential for that to recur?

Yes, so we have no incremental amount assumed in the second half guide. Our total claim was just over $30 million, and we've recovered $27 million to-date. So I'd say that the large majority that's left is in reconciliation. So I would expect the amount that's left to go is fairly small. And we - the timing that's a little bit unknown, just as we reconcile of those last few batches of transactions.

I see. And just to clarify as well in your guide. You've assumed nothing for fetch, because it hasn't closed. But just how we should we think about the profit impact that small business are now, but assume you're planning to invest fairly heavily or aggressively and it would that being material in the second half or fourth quarter.

So it is not assumed in the guide, since we haven't closed and that's about a $10 million run rate revenue business. And I'm profitable at this time as it scales. But I think that material within the within the margins of our overall guide.

Okay, very good. Thank you.

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

So to just to wrap up, I would like to thank our employees and partners for going above and beyond to serve our customers as they stretch to meet heightened expectations in the increasingly on-demand economy. While we are focusing on maximizing profit or growth in the business, our top priority continues to be protecting the health and well-being of our employees, partners, and customers as we recover from the pandemic. We're also looking forward to welcoming the Fetch Robotics team once we close the transaction. Thank you and have a great day everyone.

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